Chapter 4 Practice Questions
1. Sally purchases an ABC Apr 30 call @ 2.50. The stock is currently selling at 31. What is her maximum gain?
A. Unlimited
B. $250
C. $3,000
D. $150
2. Sally purchases three ABC Apr 30 calls @ 2.50. The stock is currently trading at 31. What is her breakeven point?
A. 30
B. 32.50
C. 37.50
D. 33.50
3. Jon shorts three ABC Apr 50 calls @ 3.50. He has no other positions in the stock. The stock is currently selling at 51. What is his maximum gain?
A. Unlimited
B. $1,050
C. $750
D. $3,950
4. If an investor is bullish on a stock, which type of strategy would she be most likely to implement?
A. Buy a put
B. Sell the stock short
C. Buy a call
D. Sell a straddle
5. Sandy shorts four ABC Apr 30 puts @ 2.50. The stock is currently selling at 31. What is her maximum loss?
A. $700
B. $1,000
C. $12,000
D. $11,000
6. Scottie shorts four ABC Apr 30 puts @ 2.50. The stock is currently selling at 31. Which of the following is true?
A. The options are in-the-money.
B. The options are out-of-the-money.
C. The options are at-the-money.
D. We cannot tell whether the options are in or out-of-the-money until the option is exercised.
7. Jon shorts three ABC Apr 50 calls @ 3.50. Which of the following would be the best reason for doing this?
A. He is bullish on ABC.
B. He has a long position in the stock, and he would like to add income to his portfolio.
C. He has long position in the stock, and he would like to protect against downside risk.
D. He has a short position in the stock, and he would like to protect against the risk that the stock price will increase.
8. Michelle shorts an ABC Apr 30 put @ 2.50. The stock is currently selling at 31. Which of the following is true?
A. The intrinsic value of the option is 1.
B. The intrinsic value of the option is 1.50.
C. The intrinsic value of the option is 0.