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Options University’s Options 101 - Part 12

Filed Under Options 101 

Options 101
Part 12- Chapter 1 Questions
How are Options Similar to Stocks?
  • Options are securities.
  • Options trade on national SEC (Securities Exchange Commission)-regulated exchanges.
  • Option orders are transacted through market makers and retail participants with bids to buy and offers to sell and can be traded like any other security.
 
How Do Options Differ From Stocks?
  • Options have an expiration date, whereas common stocks can be held forever (unless the company goes bankrupt). If an option is not exercised on or before expiration, it no longer exists and expires worthless.
·         Options exist only as “book entry,” which means they are held electronically. There are no certificates for options like there are for stocks.
  • There is no limit to the number of options that can be traded on an underlying stock. Common stocks have a fixed number of shares outstanding.
·         Options do not confer voting rights or dividends. They are strictly contracts to buy or sell the underlying stock or index. If you want a dividend or wish to vote the proxy, you need to exercise the call option.
 
Key Concepts
1)    The intrinsic value of an option represents the “immediate benefit” in using the option.
2)    Any value in the option above the intrinsic value is the time value.
3)    In-the-money options have intrinsic value. Out-of-the-money options have no intrinsic value.
4)    At-the-money options carry the highest time value.
5)    You only lose your time value at option expiration. Any intrinsic value must remain.
 
 
Chapter One Questions
 
1)    Call options give buyers the:
a) Obligation to buy stock
b) Right to buy stock
c) Obligation to sell stock
d) Right to sell stock
 
2)    Put options give buyers the:
a) Obligation to buy stock
b) Right to buy stock
c) Obligation to sell stock
d) Right to sell stock
 
3)    Option sellers:
a) Have rights
b) Receive premiums
c) Have obligations
d) Both b and c
 
4)    One option contract generally controls how many shares of stock?
a) 25
b) 50
c) 75
d) 100
 
5)    You bought an Intel $25 call. The “$25” figure is called the:
a) Contract value
b) Moneyness
c) Strike price or exercise price
d) Intrinsic value
 
6)    The intrinsic value of an option represents the:
a) Time value
b) Immediate benefit
c) Contract value
d) Strike price
 
7)    You are long an ABC $40 call. How much will it cost to exercise the call?
a) $40
b) $400                       
c) $4,000
d) $40,000
 
8)     If you are “long” options:
a) You are not required to ever buy or sell the stock
b) You are required to buy or sell the stock if assigned
c) You are obligated to buy stock at some time
d) You receive premiums
 
9)    Which of the following is true?
a) Long positions get assigned, short positions exercise
b) Long positions exercise, short positions get assigned                   
c) Long and short positions can exercise
d) Long and short positions can get assigned
 
10)    XYZ is trading for $74. The XYZ $70 call is trading for $4.50. What are the intrinsic and time values?
a) $4 intrinsic, 50 cents time
b) $4.50 intrinsic, $0 time                   
c) 50 cents intrinsic, $4 time
d) $0 intrinsic, $4.50 time
 
11)    ABC is trading for $107. The ABC $110 call is trading for $4. What are the intrinsic and time values?
a) $1 intrinsic, $3 time
b) $3 intrinsic, $1 time            
c) $0 intrinsic, $4 time
d) $4 intrinsic, $0 time
 
12)    An option is bidding $3 and asking $3.20. What does this mean?
a) The highest price that someone will pay is $3 and the lowest price at which someone will sell is $3.20.
b) The highest price that someone will pay is $3.20 and the lowest price at which someone will sell is $3.
c) You can currently buy the option for $3.20 and sell it for $3
d) Both a and c
 
13)    The bid and ask represent the:
a) Lowest bidder and highest offer
b) Highest bidder and highest offer
c) Highest bidder and lowest offer
d) Lowest bidder and lowest offer
 
14)    Microsoft is trading for $29 and the $30 put is trading for $2.50. This put is:
a) $1 in-the-money
b) $1 out-of-the-money
c) $2.50 in-the-money
d) $2.50 out-of-the-money
 
15)    ABC stock is trading for $47. You just purchased an ABC $45 call for $3. If the stock remains at $47 at expiration, what is the amount, if any, you will lose on this option?
            a) $0
b) $1
c) $2
d) $3
 
16)    If you wish to exercise an option, you must:
a) Find a buyer or seller
b) Do so only at expiration
c) Submit assignment instructions
d) Submit exercise instructions
 
17)    The OCC:
a) Guarantees an option’s profit
b) Is the buyer to every seller and seller to every buyer
c) Acts as a mediator for disputes
d) Requires you to become a member before trading options
 
18)    Options trade in units called:
a) Contracts
b) Shares
c) Round lots
d) OCC units
 
19)    The last trading day for options is:
a) The second Thursday of the expiration month
b) The second Friday of the expiration month
c) The third Friday of the expiration month
d) Saturday following the third Friday
 
20)    Because a portion of an option’s value declines over time, options are referred to as:
a) Physical delivery assets
b) Wasting assets
c) Linear assets
d) Cash delivery assets
 
21)    Which “style” are all equity options?
a) Bermudan
b) Asian
c) European
d) American
 
22)    If you sell a put option, you have:
a) The potential obligation to buy stock
b) The potential obligation to sell stock
c) The right to buy stock
d) The right to sell stock
 
23)    If you sell a call option, you have:
a) The potential obligation to buy stock
b) The potential obligation to sell stock
c) The right to buy stock
d) The right to sell stock
 
24)    If you sell an option, you collect a premium. What happens to that premium if you are assigned? 
a) You only keep the premium if you are assigned
b) Option sellers do not receive the premium
c) You keep the premium regardless of whether you’re assigned or not
d) You only keep the premium if you are not assigned
 
25)    If you buy or sell an option, you can escape your obligations by: 
a) Entering a reversing trade in a different month
b) Entering a reversing trade at a different strike
c) Entering the same trade again
d) Entering a reversing trade
 
Answers will be given on the next part of Options 101……

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