Question:
Mr. Booker is short 400 shares of UTC at 50. If UTC declines to 32, all of the following are methods to protect his unrealized gain EXCEPT:
Answer:
Write four 35 calls Explanation: Writing an uncovered call will not protect anything as uncovered calls have unlimited risk.
Question:
Which of the following should you recommend to a client who holds a large portfolio of equity securities and wishes to enjoy further gains while protecting his or her profits?
I. Write calls
II. Buy calls
III. Write puts
IV. Buy puts
Answer:
I or IV Explanation: This client wants to enjoy further gains and protect his or her profits. This may be accomplished by writing calls (the client will receive the premium) and buying puts (the client will protect his or her profits).
Question:
Expiring listed options cease trading:
Answer:
At 3 p.m. Central time and 4 p.m. Eastern time on the business day prior to expiration date Explanation: Expiring listed options cease trading at 3 p.m. Central time and 4 p.m. Eastern time on the business day prior to expiration date.
Question:
A customer buys one ABC July 60 put for 5 and sells 1 ABC July 70 put for 11. He or she will have a profit:
I. When the difference between the premiums is less than $6 per share
II. When both puts expire unexercised
III. When the
difference between the premiums is more than $6 per share
IV. When both puts are exercised
Answer:
I & II only Explanation: The customer pays out $500 when buying the put and receives $1,100 when selling the put. At that point, the difference is $600 profit. The breakeven price would be $64; therefore, the customer has a profit when the difference between the premiums is less than $6 per share or if both puts expire.
Question:
Options have exercise limits. These limits state that there are a maximum number of contracts that an individual or a group of individuals acting together may exercise within:
Answer:
Three consecutive business days Explanation: The exercise limits of options contracts refer to the fact that an individual or group of individuals acting together may only exercise a certain number of contracts within three consecutive business days.
Question:
Mr. Koslin, a customer, simultaneously buys 100 UTC at $30 and sells 1 UTC Oct 30 listed call at $8. Excluding commissions and dividends, at what market price per share of UTC stock will Mr. Koslin breakeven?
Answer:
$22 Explanation: Since Mr. Koslin sold a call and received an $8 premium, the stock would have to decline below 22 before he would lose money.
Question:
A customer purchased a 10% municipal bond due 6/1/08 at par. The bond has an annual put option at par. Which of the following statements is false?
Answer:
The option cannot be exercised without the issuer's consent. Explanation: If an investor has a put option privilege, the put option may be exercised at the discretion of the holder and does not need the permission of the issuer.
Question:
A customer is long U.S. Treasury bonds. He or she expects a small increase in interest rates and wants to increase total return. This can be done by:
Answer:
Selling Treasury bond call options Explanation: Since the customer expects a small increase in interest rates, we can infer that the existing debt security will decline in value. The customer can increase his or her total return by selling Treasury bond call options. These options will not be exercised due to the fact that the Treasury bonds will decline in value in response to interest rate increases.
Question:
An investor has the following position: Long 100 U.S. Treasury 7 1/4 of 2012 at 98; short 1 U.S. Treasury 102 call at 1.08. If interest rates rise sharply, which will probably occur?
Answer:
The option will expire unexercised. Explanation: When interest rates rise sharply, the value of existing debt securities declines. The call option the customer sold will not be exercised and will most likely expire.
Question:
A customer simultaneously purchases one ABC January 35 put for a premium of $3 and 100 shares of ABC stock for $35 a share. What is the maximum loss the customer could sustain?
Answer:
$300 Explanation: When the customer buys the put for $3, he or she has an outgo of $300. When the customer buys the stock for $35 a share, he or she has an outgo of $3,500. If the worst possible thing happened, the customer could still sell the stock with the put for $3,500, thereby losing a maximum of $300.
Question:
All of the following will cover a put writer in a margin account EXCEPT:
Answer:
If he or she is long the underlying stock Explanation: Shorting the stock will cover a put writer. Depositing cash will cover the put writer. Owning a put on the same stock with at least as high of an exercise price and at least as long of an expiration date will also cover the put writer. Remember, cash covers the put writer. This question wants a choice of what does not cover the put writer due to the word except in the questions. Owning the underlying stock will not cover the writer because when a writer is exercised, the writer must have cash to buy the stock, not the shares of stock themselves for delivery.
Question:
The option premium is:
Answer:
The cost of the option Explanation: The buyer/holder of the option pays the premium which is his or her cost of the option.
Question:
The standard contract size of British Pound (BP) options is 12,500. If a client purchases two British Pound (BP) March 140 calls at 4.50, he or she will pay a total premium of:
Answer:
$1,125 Explanation: The main thing to remember here is that foreign currency premiums are expressed in U.S. cents. Thus, the premium of 4.50 is in fact 4 1/2 cents. You will need to move the decimal point two places to the left to get to $0.045 (4 1/2 cents). Next, multiply $0.045 by the 12,500 Pounds to get to the premium of $562.60 for one contract. Since the client purchased two contracts, we multiply 562.50 by two and arrive at our answer of $1,125.
Question:
A customer is long U.S. Treasury bonds. He or she expects a small increase in interest rates and wants to increase total return. This can be done by:
Answer:
Selling Treasury bond call options Explanation: Since the customer expects a small increase in interest rates, we can infer that the existing debt security will decline in value. The customer can increase his or her total return by selling Treasury bond call options. These options will not be exercised due to the fact that the Treasury bonds will decline in value in response to interest rate increases.
Question:
An investor buys one ABC May 60 call for a premium of $6 and sells one ABC May 70 call for a premium of $3. What is the investor's maximum gain?
Answer:
$700 Explanation: If the breakeven is $63, the investor's profit would occur between a market price of $63 and $70. This means that the maximum gain would be $700.
Question:
A client sells one TPA Oct 55 call at 6 and one TPA Oct 65 put at 6. What would the customer's profit or loss be if just prior to the Oct expiration date, the stock is trading at 63 and the customer closes out his or her position at the intrinsic value?
Answer:
$200 profit Explanation: To answer this question, you will need to know two things: what closing out a position means and what intrinsic value is. To close out the position, you do the opposite of the original option position. For example, if the option contract indicated sell, in order to close the position, you would buy. 'Intrinsic value' is the difference between the exercise price of an option and the market value of the underlying security. In this question, we start off with two sell positions that indicate that the premiums will be received by the customer for a total of $1,200 ($600 plus $600). With the market price at 63, the first position (call) shows a difference of eight point
Question:
A customer simultaneously purchases one ABC January 35 put for a premium of $3 and 100 shares of ABC stock for $35 a share. What is the maximum loss the customer could sustain?
Answer:
$300 Explanation: When the customer buys the put for $3, he or she has an outgo of $300. When the customer buys the stock for $35 a share, he or she has an outgo of $3,500. If the worst possible thing happened, the customer could still sell the stock with the put for $3,500, thereby losing a maximum of $300.
Question:
In November, an investor buys 100 shares of ABC stock at $50 per share. He or she also writes an ABC April 50 call for a premium of $8. If the call is exercised when the stock is at 55 and the long stock is delivered, what is the profit or loss?
Answer:
Profit of $8 per share Explanation: When the investor buys the stock at $50, he or she has an outgo of $5,000. When the investor writes the call for $8, he or she has an income of $800. If the call is exercised at 50, he or she has an additional income of $5,000. This makes for a total income of $5,800 and a total outgo of $5,000 − an $800 profit or $8 per share.
Question:
A customer purchases both one ABC January 35 put for a premium of $3 and 100 shares of ABC stock for $35 a share. The customer will break even when the stock is selling at what price just before the expiration date?
Answer:
When the customer buys the put for $3, he or she has an outgo of $300. When the customer buys the stock for $35 a share, he has an outgo of $3,500. If the stock rises to $38, the customer would breakeven because he or she has spent a total of $3,800.
Question:
A customer with no other cash or securities in the account sells 1 RET February 40 call for 6 and buys 100 shares of RET at $45 per share. What is the market price per share of RET stock at which the customer will breakeven?
Answer:
39 Explanation: When the customer sells the call, he or she has an income of $600. When the customer buys the stock, he or she has an outgo of $4,500. Overall, the customer is left with an outgo of $3,900; therefore, the market price per share of RET stock must be 39 to breakeven.
Question:
A customer purchases 100 shares of UTC at 59 and one UTC 60 put at 4. When UTC is at 55, the customer exercises the option. What is the customer's profit or loss?
Answer:
$300 loss Explanation: When the customer buys the stock at 59, he or she has an outgo of $5,900. When the customer buys the put at 4, he or she has an outgo of $400. This leaves the customer with a combined total output of $6,300. When the customer exercises the put and sells the stock for 60, he or she has an income of $6,000. An output of $6,300 and an income of $6,000 would leave the customer with a $300 loss.