14. Options

1. Which of the following statements is TRUE ?

An American option can only be exercised upon expiration while a European option can be exercised at any time. The potential profit from a put option contract to the writer will rise as the share price falls. The difference between “writing covered” and “writing naked” when writing options contracts is that writing naked is less risky. The potential profit from a call option contract to the writer will fall as the share price rises.

2. Which of the following statements is FALSE?

The break even price of share for a call option is the strike price plus the call premium. The break even price of share for a put option is the strike price less the put premium. A call option will always be profitably exercised when the share price is above the strike price plus the call premium. A put option will always be profitably exercised when the share price is below the strike price.

3. Company ABC’s share price is currently 300 pence and each contract refers to 1000 shares. A call premium for a strike of 325 pence is currently priced at 10 pence. If the share price goes to 340 pence on expiration then the option:

holder will make a profit of £300 holder will make a net profit of £50 holder will make a net profit of £150 writer will make a net profit of £100

4. Which one of the following will provide some degree of hedging protection against a fall in the stock market?

Buying a put option of a stock index futures contract. Writing a put option on a stock index futures contract. Buying a call option on a stock index futures contract Taking a long position in a stock index futures contract.

5. Which of the following properly describes a long strangle position in the options market?

It is a combination of a call and put option on a security with the same expiration date but different exercises prices. It is a combination of a call and put option on a security with different expiration dates but the same exercises prices. It is a combination of a call and put option on a security with the same expiration dates and the same exercises prices. It is a combination of a call and put option on a security with different expiration dates and different exercises prices.

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