Exercise
Answer the following questions.
1. The holder of a call option can expect to receive all of the following potential benefits except:
A. The potential for unlimited profits
B. A premium
C. A right to exercise on demand
D. Limited risk
2. Of the following prices, which is the lowest price that VMBX Aug 20 call @ 3 would be in-the-money?
A. $18
B. $20
C. $22
D. $24
3. ABC stock is currently trading at $23 per share, and your client has just written an ABC Jun 20 put @ 5. What is the maximum amount your client could lose on this option?
A. $1,500
B. $2,000
C. $500
D. Unlimited
4. Which of the following options is out-of-the-money?
A. ABC Mar 20 call, ABC is trading @ $22
B. ABC Jan 40 call, ABC is trading @ $40
C. ABC Apr 10 put, ABC is trading @ $15
D. ABC Jun 50 put, ABC is trading @ $48
5. Sylvia buys 20 contracts of this option: SMA Nov 45 put @ 3. Two months later, the underlying stock is trading at $38. Could she exercise her contracts profitably? What would be her profit or loss?
A. Yes, $14,000
B. Yes, $8,000
C. No, $20,000
D. No, $14,000
Answers
1. B. The holder of an option has bought an option’s rights. As purchaser, an investor pays the premium. The premium is the most she can lose so her risk is limited. Option holders also have the right to exercise the contract on demand. The holder of a call option has the potential for unlimited profits as the value of the underlying stock increases.
2. C. When a contract is “in-the-money” it means the contract has value if it is sold. It does not necessarily mean the option is making a profit. Call options are in-the-money if the current trading value of the underlying security is higher than the strike price. At $22, the position is still unprofitable, but exercising the option will reduce its $3/share cost. In this example, the call option owner has the ri