NameOptions Quiz28. A customer owning 100 shares of stock could receive protection by:a.Buying another 100 shares of the stockb.Buying a callc.Buying a putd.Selling a put Show
29. A customer buys 100 shares of ABC at $69 and buys 1 ABC Jan 70 Put @ $7. Thebreakeven point is: 30. On the same day a customer buys 1 ABC Jan 50 Call @ $2 and sells 1 ABC Jan 35 Call @$8 when the market price of ABC is $41. The maximum potential gain is: 31. In January, a customer sells 1 ABC Jun 55 Call @ $6 when the market price of ABC is $56.If ABC rises to $62 and the writer is assigned, the customer will: 32. A customer buys 200 shares of GE at $72 and sells 2 GE Mar 70 Calls @ $6. Themaximum potential loss is:a.$6,400b.$12,800c.$13,200d.$14,400 33. A customer buys 200 shares of GE at $72 and sells 2 GE Feb 70 Calls @ $6. Thebreakeven point is: A customer owning 100 shares of stock could receive protection by: A. buying another 100 shares of the stock The best
answer is C. In order to hedge a long stock position against a downside market move, the best choice is to buy a put. The long put option allows the holder to put (sell) the stock at the exercise price if the market falls - protecting the stock position from downside market risk. A customer buys 100 shares of XYZ stock at $80 and buys 1 XYZ Oct 80 Put @ $3 on the same day in a cash
account. The stock rises to $88. The put expires and the customer sells the stock in the market at the current price. The customer has a(n): A. $300 loss The best answer is C. The customer buys the put for $3 and buys the stock at $80 for a total outlay of $83 per share. The put has been purchased as protection if the
stock price should fall. In this case, the stock price rises to $88, so the customer lets the put expire "out the money" and sells the stock in the market at the current price. The net gain is $88 - $83 = $5 or $500 on 100 shares. A customer purchases 100 shares of ABC stock at $34 and buys 1 ABC Jan 30 Put @ $2 on the same day in a cash account. Subsequently, the stock goes to $44 and the
customer's put expires and the customer sells the stock in the market at the prevailing market price. The customer has a(n): A. $200 loss The best answer is C. The customer buys the put for 2 and buys the stock at $34 per share. The customer purchases the Jan 30 Put as protection if the stock price falls below $30. If
the stock does fall below $30 per share, then the customer would exercise the put, selling the stock at $30. This limits downside loss. In this case, the stock price rises to $44 and the put expires "out the money". The stock is sold at the prevailing market price. The stock that was purchased for $34, is sold for $44, for a profit of $10 per share. Since a premium of $2 was paid for the put, the net profit is $8 per share = $800 on the 100 shares owned. A customer buys 100 shares of ABC stock at $56 and buys 1 ABC Jul 55 Put @ $2.50 on the same day. If the stock falls to $50 and the put is exercised by the customer, the customer will have a: A. $250 loss The best answer is B. If the stock price drops below $55, the customer will exercise the put and sell the stock (purchased at $56) at the $55 strike price. The customer will lose 1 point ($100) on the stock in addition to the $2.50 per share ($250) paid in premiums, for a total loss of $350. A customer buys 100 shares of ABC at $71 and buys 1 ABC Jan 75 Put @ $8. ABC goes to $61 and the customer exercises the put. The customer's loss is: A. $400 The best answer is A. The customer buys the stock at $71 and sells it for $75 by exercising the put for a $4 gain. She paid $8 per share in premiums for the put contract, so the net loss is $4 points. A customer buys 100 shares of ABC stock at $48 and buys 1 ABC Jan 50 Put @ $5. The breakeven point is: A. $43 The best answer is B. The customer paid $48 for the stock and $5 for the put, for a total outlay of $53. To breakeven, the stock must be sold for $53. To summarize, the formula for breakeven for a long stock / long put position is: Long Stock/Long Put Breakeven = Stock Cost + Premium A customer buys 100 shares of XYZ at $51 and buys 1 XYZ Jan 50 Put @ $4. The maximum potential gain is: A. $400 The best answer is D. Since the customer has a long stock position, his or her potential gain is unlimited. If the market moves up, he or she lets the put expire "out the money" and sells the stock in the market at the higher price. A customer buys 100 shares of XYZ at $51 and buys 1 XYZ Jan 50 Put @ $5. The maximum potential loss is: A. $500 The best answer is B. The long put gives the stock owner the right to sell at $50. Since he bought the stock at $51, exercising results in a 1 point stock loss. In addition, the premiums paid of $5 are lost, for a total loss of 6 points or $600 maximum. A customer buys 100 shares of XYZ at $49 and buys 1 XYZ Jan 50 Put @ $5. The maximum potential loss is: A. $400 The best answer is A. The long put gives the stock owner the right to sell at $50. Since he bought the stock at $49, exercising results in a 1 point stock profit. However, the premiums paid of $5 are lost, for a net loss of 4 points or $400 maximum. A customer buys 100 shares of ABC stock at $58 and buys 1 ABC Jul 55 Put @ $2.50 on the same day. The maximum potential loss is: A. $250 The best answer is B. If the market should fall, the customer will exercise the put and sell the stock at the strike price, limiting potential loss. The put contract gives the customer the right to sell the stock at $55. Since the stock was purchased at $58, 3 points will be lost on the stock. In addition, 2.50 points were paid in premiums for a maximum potential loss of 5.50 points or $550. A customer buys 100 shares of ABC at $65 and buys 1 ABC Jan 65 Put @ $3. At which market price is the position profitable? A. $70 The best answer is A. To breakeven, the customer must recover the $3 paid in premiums and the $65 paid for the stock (total of $68). He must sell the stock in the market above $68 to have a profit. The only choice above $68 is Choice A, which is $70. To summarize, the formula for breakeven for a long stock / long put position is: Long Stock/Long Put Breakeven = Stock Cost + Premium A customer buys 100 shares of ABC at $50 and buys 1 ABC Jan 50 Put @ $5. This position results in a profit when the price of ABC stock: A. goes below $55 The best answer is B. The customer has paid $50 for the stock and $5 for the put, for a total of $55 paid. If the market rises to $55, the customer breaks even. If the market rises above $55, the customer can sell the stock in the market for more than $55 and will have a profit. If ABC goes below 55, the customer will lose money because of the premium paid for the put, with the maximum loss being 5 points or $500 (since the stock purchased at a total cost of $55 can always be sold by exercising the $50 put). A customer buys 100 shares of ABC at $30 and buys 1 ABC Jan 30 Put @ $5. At which market price is the position profitable? A. $25 The best answer is D. To breakeven, the customer must recover the $5 paid in premiums and the $30 paid for the stock (total of $35). He must sell the stock in the market above $35 to have a profit. The only choice above $35 is Choice D, which is $40. To summarize, the formula for breakeven for a long stock / long put position is: Long Stock/Long Put Breakeven = Stock Cost + Premium A customer buys 100 shares of XYZ at 87 and buys 1 XYZ Jan 90 Put @ $8. Just prior to expiration, the stock is trading at $87. The customer closes the option position at a premium of $3. One week later, the stock moves to $93 and the customer sells the stock position in the market. The net gain or loss on all transactions is: A. $100 loss The best answer is B. The put contract was purchased at $8 and closed (sold) at $3 for a net loss of $5. The stock was purchased at $87 and sold at $93 for a net gain of $6. The net of all transactions is a 1 point or $100 gain. A customer buys 100 shares of XYZ at $74 and buys 1 XYZ Jan 75 Put @ $6. Just prior to expiration, the stock is trading at $72. The customer closes the option position at a premium of $2. One week later, the stock moves to $79 and the customer sells the stock position in the market. The net gain or loss on all transactions is: A. $100 loss The best answer is B. The put contract was purchased at $6 and closed (sold) at $2 for a net loss of $4. The stock was purchased at $74 and sold at $79 for a net gain of $5. The net of all transactions is a 1 point or $100 gain. A customer buys 100 shares of XYZ at 49 and buys 1 XYZ Jan 50 Put @ $5. Just prior to expiration, the stock is trading at $49. The customer closes the option position at a premium of $2. One week later, the stock moves to $55 and the customer sells the stock position in the market. The net gain or loss on all transactions is:
A. $300 loss The best answer is B. The put contract was purchased at $5 and closed (sold) at $2 for a net loss of $3. The stock was purchased at $49 and sold at $55 for a net gain of $6. The net of all transactions is a 3 point or $300 gain. A customer who is short stock will buy a call to: A. hedge the short stock position in a falling market The best answer is C. A customer who has shorted stock is bearish on the market. However, the potential loss for a short seller of stock is unlimited if the market should rise, forcing the customer to replace the borrowed shares at a much higher price. To limit this risk, the purchase of a call allows the stock position to be bought at a fixed price (by exercising the call), if needed, in a rising market. Which of the following option positions is used to hedge a short stock position? A. long call The best answer is A. When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the market rises, the loss potential is unlimited. The purchase of a call allows the stock to be bought in at a fixed price, limiting upside risk. What position can an investor take to hedge a short stock position? A. long put The best answer is C. When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the market rises, the loss potential is unlimited. The purchase of a call allows the stock to be bought in at a fixed price, limiting upside risk. On the same day in a margin account, a customer sells short 100 shares of ABC at $44 and buys 1 ABC Jan 45 Call @ $2.50. If the market price of ABC rises to $50 and the customer exercises the call, the result is a: A. $100 loss The best answer is C. If the market price rises to $50, the customer exercises the call and buys in the stock at the $45 strike price. Thus, the customer sells the stock at $44, and buys it back at $45, for a 1 point loss on the stock. In addition, the customer loses the 2.50 point premium paid for the call. The total loss is 3.50 points or $350. A customer sells short 100 shares of ABC stock at 40 and buys 1 ABC Mar 40 Call @ $5. The stock rises to $80 and the customer exercises the call. The gain or loss is: A. $500 gain The best answer is B. If the market rises, the customer can exercise the call and buy the stock at $40. These shares can be used to replace the "borrowed" shares sold short at $40. On the stock, there is no gain or loss. However, the customer loses the $500 paid in premiums. A customer sells short 100 ABC at $46 and buys 1 ABC Jan 45 Call @ $3. ABC goes to $30 and the customer lets the call expire and closes out the stock position at the market. The customer has a: A. $300 loss The best answer is C. The customer has sold short shares of stock at $46 thinking that the market is going to go down. To protect his stock position from going up, the customer buys a call as well (which allows him to buy the stock at the strike price, if needed, in a rising market). Here, the market does what the customer wants it to do and goes down. As the market goes down, the call contract will expire "out the money." The stock that was sold for $46 can be purchased in the market for $30 and replaced, for a 16 point gain. However, since $3 was paid in premiums for the call, the net gain is $13 per share or $1,300. A customer sells short 100 ABC at $45 and buys 1 ABC Jan 45 Call @ $3. ABC goes to $30 and the customer lets the call expire and closes out the stock position at the market. The customer has a: A. $300 loss The best answer is C. The customer has sold short shares of stock at $45 thinking that the market is going to go down. To protect his stock position from going up, the customer buys a call as well (which allows him to buy the stock at the strike price, if needed, in a rising market). Here, the market does what the customer wants it to do and goes down. As the market goes down, the call contract will expire "out the money." The stock that was sold for $45 can be purchased in the market for $30 and replaced, for a 15 point gain. However, since $3 was paid in premiums for the call, the net gain is $12 per share or $1,200. A customer sells short 100 shares of PDQ at $58 and buys 1 PDQ Jul 60 Call @ $3. The breakeven point is: A. $55 The best answer is A. The customer sold the stock for $58 and paid $3 in premiums for the long call, for a net receipt of $55. To breakeven, the customer must buy back the stock position at this price. To summarize, the formula for breakeven for a short stock / long call position is: Short Stock/Long Call Breakeven = Short Sale Price - Premium On the same day in a margin account, a customer sells short 100 shares of ABC at $44 and buys 1 ABC Jan 45 Call @ $2.50. The customer will break even at: A. $41.50 per share The best answer is A. The customer has sold short the stock at $44, hoping to profit if the price should fall. As a hedge, the customer bought the call option to buy in the stock at a price of $45 if the market should rise. This protects the short stock position from unlimited upside loss potential. Since the customer sold the stock at $44 and paid $2.50 for the call option, the customer has a net sale amount of $41.50. To break even, the customer must buy back the stock at $41.50 per share. To summarize, the formula for breakeven for a short stock / long call position is: Short Stock/Long Call Breakeven = Short Sale Price - Premium A customer sells short 100 shares of ABC stock at $41 and buys 1 ABC Mar 40 Call @ $5. The maximum potential gain is: A. $3,500 The best answer is B. If the stock falls, the customer gains on the short stock position. The customer sold the stock for $41. If it falls to "0," the customer can buy the shares for "nothing" to replace the borrowed shares sold and make 41 points. The customer lets the call expire "out the money" losing 5 points, so the maximum potential gain is 36 points = $3,600. A customer sells short 100 shares of ABC stock at $40 and buys 1 ABC Mar 40 Call @ $5. The maximum potential loss is: A. $500 The best answer is A. The long call limits loss on the short stock position in a rising market. The stock was sold for $40 and can be bought back at $40 by exercising the call. The only loss to the customer is the premium paid of 5 points or $500. A customer sells short 100 shares of MNO at $48 and purchases 1 MNO Jan 45 Call @ $2.50. MNO drops to $41.25 and the customer closes the option contract at $1.40 and buys the stock at the current market price. The customer has a(n): A. $112 loss The best answer is B. The customer shorts the stock at $48 and bought a call, which protects the stock position if the market were to go up. Without the call, as the market rises, the customer would have the potential for infinite loss. As the market drops, the customer's call loses value, but the short stock position increases in value. The call contract that was originally bought for $2.50; is closed (sold) for $1.40; for a loss of -$1.10. The stock that was originally sold for $48; is purchased for $41.25; for a gain of +$6.75. The net profit is: +$6.75 - $1.10 = +$5.65 = $565 for 100 shares. On the same day, a customer buys 100 shares of ABC at $40 and sells short 100 shares of XYZ at $50. The customer then buys 1 ABC Jan 40 Put @ $4 and 1 XYZ Jan 50 Call @ $5. XYZ rises to $60 and the customer exercises the call. ABC falls to $25 and the customer exercises the put. The net gain or loss on all transactions is: A.
$500 loss The best answer is C. When XYZ rises, the customer exercises the long call to buy XYZ at $50. This stock is used to cover the short sale of XYZ stock at $50. There is no gain or loss on the stock but the premiums paid of $500 for the call are lost. When ABC falls, the customer exercises the long put to sell ABC at $40. Since the customer bought the stock at $40, there is no gain or loss on the stock. However, the customer does lose the $400 paid in premiums for the put. The total loss is $900. On the same day, a customer buys 100 shares of ABC at $25 and sells short 100 shares of XYZ at $35. The customer then buys 1 ABC Jan 25 Put @ $4 and 1 XYZ Jan 35 Call @ $6. XYZ rises to $42 and the customer exercises the call. ABC falls to $19 and the customer exercises the put. The net gain or loss on all transactions is: A. $200 loss The best answer is C. When XYZ rises, the customer exercises the long call to buy XYZ at $35. This stock is used to cover the short sale of XYZ stock at $35. There is no gain or loss on the stock but the premium paid of $600 for the call is lost. When ABC falls, the customer exercises the long put to sell ABC at $25. Since the customer bought the stock at $25, there is no gain or loss on the stock. However, the customer does lose the $400 paid in premiums for the put. The total loss is $1,000. What is the maximum potential loss for a customer who is short 100 shares of ABC stock at $39 and short 1 ABC Jan 35 put at $6?What is the maximum potential loss for a customer who is short 100 shares of ABC stock at $39 and short 1 ABC Jan 35 Put at $6? unlimited, If the market rises, the put contract expires, but the customer is responsible for covering his or her short stock position.
Which of the following is an option strategy that limits risk limits profits and is on both sides of the market?The bull put spreads is a strategy that “collects option premium and limits risk at the same time.” They profit from both time decay and rising stock prices. A bull put spread is the strategy of choice when the forecast is for neutral to rising prices and there is a desire to limit risk.
Which of the following option options is used to hedge a short stock position?It is possible to hedge a short stock position by buying a call option.
Which two of the following are fully hedged stock positions quizlet?Which TWO of the following are fully hedged stock positions? The best answer is C. To hedge a long stock position, buy a put (buy the right to sell the stock at a fixed price in a falling market). To hedge a short stock position, buy a call (buy the right to buy the stock at a fixed price in a rising market).
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A customer buys 100 shares of ABC at $69 and buys 1 ABC Jan 70 Put @ $7 the breakeven point is
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