Multiple Choice
1.If a call option with a striking price of $50 is purchased for $3 ½, the maximum loss is _____.
a.$3 ½
b.$46 ½
c.$50
d.unlimited
2.Which of the following strategies has the highest possible loss?
a.buying a call
b.writing a naked call
c.writing a covered call
d.buying a put
3.Which of the following terms is least common?
a.long call
b.short call
c.covered call
d.covered put
4.Writing a covered call results in a position similar to a
a.fiduciary put.
b.long put.
c.long call.
d.long stock position.
5.Fiduciary puts are also called
a.regulatory puts.
b.cash-secured puts.
c.long puts.
d.uncovered puts.
6.If someone writes a put, they usually want the market to
a.go up.
b.go down.
c.stay unchanged.
d.fluctuate.
7.If someone writes a naked call, they usually want the market to
a.go up.
b.go down.
c.stay unchanged.
d.fluctuate.
8.A person who sought to buy stock at a price below the current price might
a.buy deep-in-the-money calls.
b.buy deep-in-the-money puts.
c.write deep-in-the-money calls.
d.write deep-in-the-money puts.
9.The most common motivation for option overwriting is
a.risk management.
b.tax reduction.
c.leverage.
d.income generation.
10.A person who sought to sell stock at a price above the current price might
a.buy deep-in-the-money calls.
b.buy deep-in-the-money puts.
c.write deep-in-the-money calls.
d.write deep-in-the-money puts.
11.The simultaneous holding of a long stock position and a long put is called a
a.fiduciary put.
b.protective put.
c.collateralized put.
d.cash-secured put.
12. Index options have little ______ risk.
a.unsystematic
b.systematic
c.market
d. total
13. Which of the following is true for writing index calls?
a.It always increases portfolio market risk.
b.It need not involve borrowing any money.
c.It is inappropriate for a tax exempt investor.
d. It lowers portfolio income.
14. A stock sells for $44 ½. An investor writes a $50 covered call at a premium of $1 1/8. The maximum loss is __________.
a. $ 1 1/8
b.$43 3/8
c.$44 1/2
d.$50
15.Six months ago, an investor bought 100 shares of XYZ at $38. Today, the stock sells for $47. The investor now writes a $50 covered call at a premium of $1 1/8. The most this person can lose of their original investment is __________.
a.$ 0
b.$11/8
c. $36 7/8
d.$47
16. In Problem 33, suppose the investor received a total of $2.00 in cash dividends while owning the stock. At option expiration, the stock price is $53 and the stock is called. The person's holding period gain is ____________.
a.5.26%
b.34.54%
c39.80%
d.47.70%
17. Which of the following statements is most correct regarding the writing of covered calls?
a.The higher the striking price, the higher the premium and the higher the risk.
b.The higher the striking price, the higher the premium and the lower the risk.
c.The higher the striking price, the lower the premium and the higher the risk.
d.The higher the striking price, the lower the premium and the lower the risk.
18.Put overwriting is most profitable in
a. rising markets.
b.falling markets.
c. flat markets.
d.periods of high interest rates.