1. You own a stock, and you’re concerned that the price of the stock may decline. What might you do to minimize risk of loss on the stock?
A. Buy a put
B. Buy a call
C. Write a put
D. Buy a warrant
2. At a single time, a stock’s price is $10 and the premium for a call option on the stock is $3.
The strike price on the option is $8. How should you explain the additional value of the
premium over the difference between strike price and stock price?
A. The stock price and option price may have been quoted at different times when stock
values were different.
B. The market value of the option premium equals the difference between the strike price
and the market value of the stock.
C. The market value of the option premium equals the difference between the stock
market value and the strike price plus a time premium.
D. The hypothetical price of the option is less than the time premium.
3. Which of the following strategies offers the greatest potential to maximize rate of return on a stock if the stock price rises after you implement the strategy?
A. Purchase a stock and supplement your return by purchasing a call option on the stock.
B. Assume a naked position in the stock with a call option.
C. Write a covered put on the stock.
D. Write a naked put on the stock.
4. You speculate that the value of a stock won’t drop, and you’re unwilling to purchase the
stock or pay a premium for an option. What position would you take to profit by the stock’s
price not dropping?
A. Write a put.
B. Purchase a call
C. Write a call.
D. Employ a covered position.
5. What is your profit or loss under the following circumstances when the stock price rises?
You buy a stock at $15 and simultaneously buy a put. The strike price on the put is $12,
and you pay a $5 premium. The stock price rises to $16.
A. $5 loss
B. $4 loss
C. $2 profit
D. $3 profit
6. What is your loss in the following situation? You write a naked put when the stock price is
$50. The strike price is $55, and the stock price drops to $40. Assume the option is near
expiration and the market doesn’t assign any additional value to the option’s intrinsic value.
7. What is your profit or loss under the following circumstances? You buy a stock for $30, and
its price suddenly drops to $25. To avoid the risk of further losses, you buy a put with a
$30 strike price for $6. Subsequently, the stock price rises to $35, the option expires, and
you sell the stock.
A. $1 profit
B. $1 loss
C. $6 loss
D. $15 loss
8. What is your profit or loss under the following circumstances? You buy a stock for $25, and
simultaneously write a covered call with a $20 strike price and $7 premium. The stock
price rises to $28, and the buyer exercises the option and you sell your ownership in
A. $3 loss
B. $2 loss
C. $2 profit
D. $3 profit
9. Which of the following positions would ordinarily minimize potential loss in terms of
percentage of investment? Assume the loss would be realized during the term of
A. Purchase a stock at $25.
B. Purchase a stock at $25 and a call on the stock for a $5 premium with a $21
C. Purchase a call option for $4.
D. Purchase a stock at $25, and a put on the stock for a $5 premium with a $29
10. The risk of shorting a stock is greater than the risk of buying a put because
A. the stock price can fall to zero, while the put limits risk to the amount of the premium.
B. a stock price change results in a relatively smaller change in an option on that stock.
C. the maximum risk of a put is the premium, while the maximum risk of shorting is
unlimited because price can rise without limit.
D. options provide unlimited hedging opportunities that render option positions less risky
than short stock positions.
11. Although arbitrage presents potential profit opportunities, the likelihood of individual
investors finding arbitrage opportunities is limited by
A. the tendency for stock values to fall away from the efficient frontier.
B. hedge strategies that combine option and stock purchases all but eliminate
C. stock and option exchange managers, who are required to notify market makers when
arbitrage opportunities present themselves.
D. market makers, who are in a better position to detect and quickly capitalize before gaps
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