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Exam 17: An Introduction to Options

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Question 21

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If the price of a stock rises, the writer of a put option profits.

A) True
B) False

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Question 22

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Stock index options permit investors to establish a position in the market without having to select individual stocks.

A) True
B) False

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Question 23

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Call options offer buyers

Because of arbitrage, an option should not sell for less than its intrinsic value.

Given the following information,      Price of a stock                             $39      Strike price of a six-month call     $35      Market price of the call                 $8      Strike price of a six-month put      $40      Market price of the put                  $3 Finish the following sentences: ​ a. The intrinsic value of the call is _________. ​ b. The intrinsic value of the put is _________. ​ c. The time premium paid for the call is _________. ​ d. The time premium paid for the put is _________. ​ At the expiration of the options (i.e., after six months have lapsed), the price of the stock is $45. ​ e. The profit (loss)from buying the call is _______. ​ f. The profit (loss)from writing the call covered (i.e., buying the stock and selling the call)is ________. ​ g. The profit (loss)from buying the put is _______. ​ h. The profit (loss)from selling the stock short is ______. ​ i. The maximum possible loss from buying the put is ______. ​ j. At expiration, the maximum price commanded by a put or a call is _______.

Investors and speculators rarely, if ever, have an opportunity to establish an arbitrage position.

The CBOE is a secondary market for put and call options.

Warrants and calls do not have

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

The price of an option is generally less than the option's intrinsic value.

A put exists with the option to sell a stock at $35. The price of the stock is $34, and the price of the put is $2. ​ a. What is the intrinsic value of the put? ​ b. What is the time premium paid for the put? ​ c. What is the percentage return from purchasing the put if, at the expiration of the put, the price of the stock is $31?

The maximum potential profit on a covered call is the time premium paid for the stock.

What are the following call options' intrinsic values and time premiums if the price of the underlying stock is $55?         Option strike price     Price of the call            Call at $50                    $7.00            Call at $55                     3.00            Call at $60                     0.50

A put is an option to sell stock at a specified price within a specified time period.

The most the individual who buys a put option can lose is the cost of the option.

A put and a call have the following terms: Call: strike price             $50              expiration date   six months Put:  strike price             $50              expiration date   six months The price of the stock is currently $55. The price of the call and put are, respectively, $9 and $1. What will be the profit from buying the call or buying the put if, after six months, the price of the stock is $40, $50, or $60?

Calls tend to sell for a time premium that exceeds the stock's price.

Call options, unlike warrants, may be written by individuals.

Options to buy stock offer

In-the-money stock index options are not exercised.