Question 1

Caroline pays 15% taxes on dividends and capital gains and 35% taxes on ordinary income. Three years ago, she purchased 100 shares of XYZ, Inc. for $70. In January, Caroline wrote a six month put option on the stock at an exercise price of $90 and received $500. Three days after the purchase, the price of XYZ dropped significantly and has not been above $80 since. The result is that the put buyer chose not to exercise her put. Ignoring commissions, Caroline's tax on this transaction is

Question 1 options:

$650

$75

$175

$225

$325

Question 2 (1 point)

Emily wrote an uncovered call option with an exercise price of $40 and received $300 for the contract. When the price of the stock reached $55, the call option holder decided to exercise the call. Ignoring commissions and taxes, what would Emily's dollar return on this investment be?

Question 2 options:

$(1,200)

$(5,200)

$(1,500)

$+1,800

$(1,800)

Question 3 (1 point)

When index option is exercised, settlement is made by cash payment, not delivery of shares. True or false?

Question 3 options:

True

False

Question 4 (1 point)

Factors that should be considered in taking a stock option position include

Question 4 options:

the anticipated direction of market movement

all of the above are relevant factors in the option decision

the dividend paid on the underlying stock

the volatility of the underlying stock

the time to expiration

Question 5 (1 point)

The strike price refers to the premium paid by the option buyer for the right to exercise the option. True or false?

Question 5 options:

True

False

Question 6 (1 point)

Option premium is used to describe the market price of option. True or false?

Question 6 options:

True

False

Question 7 (1 point)

Last month when IBM was selling for $86, Dan purchased a call option on IBM with an exercise price of $90 for $2 per option or $200 total. Yesterday IBM closed at $95. Based on the minimum value of the contract, if Dan sells his call at yesterday's close, what would his return be?

Question 7 options:

4%

6%

50%

150%

250%

Question 8 (1 point)

An American option may be exercised only at maturity. True or false?

Question 8 options:

True

False

Question 9 (1 point)

A call is said to be "in-the-money" when the strike price is _____ the market price;

Question 9 options:

Equal to

Greater than

Less than

May be more than one of the above depending on the option premium

Question 10 (1 point)

Options are not an actual security. True or False?

Question 10 options:

True

False

Question 11 (1 point)

Uses of options include

Question 11 options:

Possibility of hedging

Limiting exposure to risk

Profitability

all of the above are uses of options

A and C are uses, but B is not

Question 12 (1 point)

Henry pays 15% taxes on dividends and capital gains and 35% taxes on ordinary income. Five years ago, Henry purchased 100 shares of ABC, Inc. for $42 a share. Three months ago, Henry wrote a call option on the shares with an exercise price of $55 a share and received $1,000 for the contract. Yesterday, when the market price of the stock was $70, the call buyer exercised his option to purchase the shares from Henry. Ignoring commissions, what would Henry's taxes on this transaction be?

Question 12 options:

$805

$345

$545

$570

$605

Question 13 (1 point)

The value of the put option will decrease in value as the share price falls. True or false?

Question 13 options:

True

False

Question 14 (1 point)

Under what circumstances can the writer of a call option expect to profit?

Question 14 options:

Stock price declines

Stock prices remain the same

The increase in stock price is less than the premium

All of the above

Question 15 (1 point)

An option provides a right to the writer and an obligation to the buyer. True or False?

Question 15 options:

True

False

Question 16 (1 point)

Options are available on

Question 16 options:

market indices

exchanged traded funds

credit events

volatility indices

all of the above all of the above

Question 17 (1 point)

Kate owns 1,000 shares of Pills Drug Firm and has heard rumors that the firm is about to be investigated by the Food and Drug Administration (FDA). She believes the stock value will decline as this news becomes more widespread, but she also believes that this is a good company that can withstand any investigation. Kate should

Question 17 options:

buy a call

buy a warrant

buy a bond issued by the firm

sell her shares

buy a put

Question 18 (1 point)

Hedging with options can give protection against loss or the stock protects the option against loss. True or false?

Question 18 options:

True

False

Question 19 (1 point)

The premium paid by the buyer of an option is the maximum amount the buyer can lose even if the stock falls to zero. True or false?

Question 19 options:

True

False

Question 20 (1 point)

The option writer determines when/if an option is exercised. True or False?

Question 20 options:

True

False