Question 1 (2.5 points) Selling a covered call option is comparable to selling a

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Question 1 (2.5 points)

Selling a covered call option is comparable to selling a stock short.

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Question 2 (2.5 points)

The intrinsic value of a call option is the strike price minus the stock's price.

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Question 3 (2.5 points)

An option's intrinsic value exceeds the option's price.

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Question 4 (2.5 points)

A warrant is an option issued by a corporation to buy its stock at a specified price within a specified time period.

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Question 5 (2.5 points)

Warrants are issued by

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Question 6 (2.5 points)

Since options offer potential leverage, they tend to sell for a time premium.

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Question 7 (2.5 points)

The intrinsic value of a put is the price of the stock minus the put's strike price.

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Question 8 (2.5 points)

The CBOE is
1. a secondary market in put and call options
2. a division of the SEC that regulated option trading
3. the first organized options exchange

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Question 9 (2.5 points)

Writing covered call options is more risky than writing naked call options

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Question 10 (2.5 points)

In addition to put and call options on individual stocks, there are also options on the market as a whole (i.e., an index).

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Question 11 (2.5 points)

The protective call strategy is an illustration of a short position.

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Question 12 (2.5 points)

To acquire a straddle, the investor

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Question 13 (2.5 points)

If a call is overvalued, put-call parity suggests that the investor should

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Question 14 (2.5 points)

Put-call parity suggests that

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Question 15 (2.5 points)

The hedge ratio is one piece of information given by the Black/Scholes option valuation model.

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Question 16 (2.5 points)

Put-call parity suggests that the sum of the prices of a stock, a call and a put on that stock, and a debt instrument maturing at the expiration of the options must equal zero.

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Question 17 (2.5 points)

According to the Black/Scholes option valuation model, the value of a call option rises as it approaches expiration.

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Question 18 (2.5 points)

According to the Black/Scholes option valuation model, a call option's value increases if

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Question 19 (2.5 points)

If the investor buys a bull spread, the individual anticipates

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Question 20 (2.5 points)

If the investor buys a bear spread, the individual anticipates

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Explanation / Answer

1. False. Although the risk is similar to seling a stock short, you can only profit as much as you got for selling the call, unlike short selling where you profit all the way down.

2.False, the intrinsic value is the stock price minus the strike price; if that is negative, the intrinsic value is zero.

3. Not for an American option, otherwise an immediate arbitrage profit could be made. Occasionally European options will trade at market prices less than their intrinsic.

4. True.

5. Firms.

6. True.

7. No, for a put, intrinsic value is stike price minus stock price, and if that is negative the intrinsic value is 0.

8. 1 and 3; the CBOE is the first seconary market in listed options.

9. No, it is less risky.

10. Yes, there are index options: SPY, QQQ, many others

11. What do you mean by a protective call? A buy-write? then the call option is sold short while the stock is long. Or do you mean a long call protecting a short stock position? The question is unclear.

12. d. A straddle is a put and call with the same strike.

13. b. buy the stock, buy the put, sell the call. That's a conversion. Then I gues the question wants you to sell a bond to pay for it. That's fine.

14. d. Calls are worth a little bit more than puts, an amount equal to the interest rate for the time period.

15. true

16. No, if you sum the prices of a stock, put, call, and bond you will not get zero.

17. false. of course not, as time goes by, options lose time premium.

18. c is always true, so must be the answer. b is never true. a and d are often true, but not 100% of the time, if interest rates decrease enough the call value will not increase; so c is the answer.

19. b, higher stock prices

20. c. lower stock prices.

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