6 Questions
- Your customer, Steve Newsome, recently purchased one put contract on Napa Valley Spirits, Inc., stock. The strike price was $50 and the premium was $4.50. He later exercised the contract. How much did he pay for the contract?
A. $5,000
B.
$500
C.
$4,550
D.
$450
$450
- An investor is long 1 Aug XYZ 30 put and XYZ has a current market value of 25. Which of the following is true?
A. The Aug 30 put is in the money by 5 points.
B. The Aug 30 put is at the money.
C. The Aug 30 put is out of the money by 30 points.
D. The Aug 30 put has no intrinsic value.
The Aug 30 put is in the money by 5 points.
- Your customer is a large exporter of electronic devices. They are delivering a large shipment to Japan and are concerned that the value of the Japanese yen may drop before they receive payment. In order to hedge this currency risk, your customer should
A. buy yen calls
B. sell yen calls
C. buy yen puts
D. sell yen puts
buy yen puts
- An investor is long 1 Jan 30 call at 2. Calculate the breakeven, maximum gain, and maximum loss.
BE 30, MG unlimited, ML 200
BE 32, MG 200, ML unlimited
BE 32, MG unlimited, ML 200
BE 2, MG 500, ML 32
BE 32, MG unlimited, ML 200
- Which of the following positions would best protect a client who has 1,000 shares of the Seabird Coffee Company (Ticker BCC)?
A. A long stock position
B. Buying 10 BCC puts
C. Buying 10 BCC calls
D. A short stock position
Buying 10 BCC puts
- A customer of a broker-dealer is opening a new options account. The customer must return the options agreement
A. signed before the account can be approved
B. before the first transaction can occur
C. signed and not later than 15 days after the account approval
D. before he will be allowed to view the options disclosure document
signed and not later than 15 days after the account approval
Study Notes
Options Trading
- A put contract gives the buyer the right to sell the underlying asset at the strike price.
- The premium is the price of the option contract.
- Steve Newsome bought a put contract on Napa Valley Spirits, Inc. stock with a strike price of $50 and a premium of $4.50, so he paid $450 for the contract.
In-the-Money Options
- An option is in the money if the current market price of the underlying asset is above the strike price for a call option, or below the strike price for a put option.
- An investor is long an August XYZ 30 put, and the current market value of XYZ is 25, so the put is in the money by 5 points.
Currency Risk Hedging
- A company exporting goods to Japan can hedge against a potential drop in the value of the Japanese yen by buying yen puts.
- This allows the company to lock in a fixed exchange rate, reducing the risk of currency fluctuations.
Breakeven, Maximum Gain, and Maximum Loss
- The breakeven point is the point at which the cost of an option is equal to its value.
- An investor is long a January 30 call at $2, so the breakeven point is $32, the maximum gain is unlimited, and the maximum loss is $200.
Portfolio Protection
- Buying puts on a portfolio of stocks can protect against potential losses if the stock prices drop.
- A client with 1,000 shares of Seabird Coffee Company (BCC) stock can buy 10 BCC puts to hedge against potential losses.
Options Account Opening
- When opening an options trading account, the customer must return a signed options agreement before the account can be approved.
Test your knowledge on calculating the cost of exercising a put contract based on given strike price and premium. Choose the correct amount that Steve paid for the put contract.
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