SIE Options and Derivatives 1 — Questions and Answers
Question 1: A call option gives the holder the right to:
- Sell shares at the strike price
- Buy shares at the strike price (Correct answer)
- Receive dividends from the underlying stock
- Short-sell the underlying stock
Correct answer: Buy shares at the strike price
A call option grants the holder the right, but not the obligation, to buy the underlying security at the strike price before expiration.
Question 2: A put option gives the holder the right to:
- Buy shares at the strike price
- Sell shares at the strike price (Correct answer)
- Receive interest on the underlying bond
- Force a stock split
Correct answer: Sell shares at the strike price
A put option grants the holder the right to sell the underlying security at the strike price before expiration.
Question 3: What is the maximum loss for a buyer of a call option?
- Unlimited loss
- Loss of the underlying stock's full value
- The premium paid for the option (Correct answer)
- The difference between market price and strike price
Correct answer: The premium paid for the option
The maximum loss for an option buyer is limited to the premium paid, since the option can expire worthless.
Question 4: An option is 'in the money' (ITM) when:
- The holder has made a profit including the premium paid
- Exercising the option would produce a positive intrinsic value (Correct answer)
- The time value exceeds the premium paid
- The underlying stock pays a dividend
Correct answer: Exercising the option would produce a positive intrinsic value
An option is in the money when exercising it would produce positive intrinsic value, regardless of the premium paid.
Question 5: What does it mean to write (sell) a covered call?
- Selling a call option while owning the underlying shares (Correct answer)
- Buying a call as protection against a short stock position
- Selling a call with no existing stock position
- Writing an option on an index rather than individual stock
Correct answer: Selling a call option while owning the underlying shares
A covered call involves selling a call option while owning the underlying shares, providing income in exchange for capping upside.
Question 6: Options traded on US exchanges are standardized and guaranteed by which entity?
- FINRA
- The SEC
- Options Clearing Corporation (OCC) (Correct answer)
- SIPC
Correct answer: Options Clearing Corporation (OCC)
The Options Clearing Corporation (OCC) acts as the issuer and guarantor for all US listed options contracts.
SIE Options and Derivatives 1
A call option gives the holder the right to: