Multiple Choice
1.Which of the following strategies most closely resembles the outright purchase of stock?
a.Buy a call, write a call with a higher striking price.
b.Buy a call, write a put.
c.Write a call, write a put.
d.Write a call, buy a put.
2.The biggest single disadvantage of writing covered calls is
a.added commissions.
b.increased risk.
c.the necessity to post margin.
d.opportunity losses if exercise occurs.
3.Which of the following is a bearish strategy?
a.write calls
b.write puts
c.buy calls and write calls with a higher striking price
d.buy puts and write puts with a higher striking price
4.Which of the following is most similar to writing a covered call?
a.writing a naked call
b.buying a protective put
c.writing a naked put
d.writing a covered put
5.An investor buys 100 shares of stock at $22 and buys a DEC 20 put @ $1. This person’s maximum loss is ____________.
a.$300
b.$500
c.$1,900
d.$2,000
6.In question 5, the person’s maximum possible gain is __________.
a.$475
b.$2,000
c.$2,275
d.unlimited
7.An investor buys 100 shares of stock at $24 and buys a DEC 20 put @ $1. This person’s maximum loss is __________.
a.$475
b.$500
c.$2,275
d.$2,000
8.An investor buys 200 shares of stock at $23 ¾ and buys one DEC 20 put @ $1. This person’s maximum loss is ____________.
a.$475
b.$100
c.$2,275
d.$2,850
9.In question 8, the person’s maximum gain is ___________.
a.$475
b.$2,000
c.$2,275
d.unlimited
10.Selling stock short and simultaneously buying a call is similar to
a.writing a naked call.
b.writing a naked put.
c.buying a put.
d.buying two calls.
11.In the “insurance policy” analogy with protective puts, which of the following is most similar to the “deductible” of the insurance policy?
a.the stock price
b.the striking price
c.the time value of the option
d.the stock price minus the striking price
12.Suppose a speculator is short shares of stock. Which of the following would be the best hedge against the short position?
a.buying a put
b.writing a put
c.buying a call
d.writing a call
13.Which of the following statements is false?
a.Writing covered calls is beneficial in falling markets, but can result in opportunity losses in rising markets.
b.Writing puts can be beneficial in rising markets, but can result in actual economic losses in falling markets.
c.Buying calls is beneficial in falling markets, but can result in economic losses in rising markets.
d.Buying puts can be beneficial in rising or falling markets, but always involves an out-of-pocket cash outlay.
14.An increase in which of the following will cause a call option to decline in value?
a.volatility
b.underlying asset price
c.striking price
d.interest rates
15.If someone writes a call while owning the underlying asset, the call is ___________.
a.covered
b.long
c.naked
d.cash-secured
16.A long position is a(n)
a.long-term investment.
b.owned asset.
c.borrowed asset.
d.a position with a paper gain.
17.If a person writes a covered call with a striking price of $45 and receives $3 in premium, exercise will occur if the stock price is above ___ on expiration day.
a.$42
b.$45
c.$48
d.$50
18.If stock is purchased at $50 and a $55 call is written for a premium of $2, the maximum possible gain per share is _________.
a.$2
b.$5
c.$7
d.$10