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FIN 501 Study Guide - Call Option, Put Option, Straddle

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beigefish258
31 Jul 2012
School
Ryerson University
Department
Finance
Course
FIN 501
Professor
Edward Blinder

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Document Summary

Call option: on common stock, grants the holder the right, but not the obligation, to buy the underlying stock at a given strike price. Put option: on common stock, grants the holder the right, but not the obligation, to sell the underlying stock at a given strike price. Strike price: price specified in an option contract that the holder pays to buy shares (in the cause of call options) or receives to sell shares (in the case of put options) if the option is exercised. Standardized stock options have a contract size of 100 shares of common stock per option contract. American option: an option that can be exercised any time before expiration. European option: an option that can be exercised only on the last day before expiration: the delivery or settlement procedure. Option chain: a list of available option contracts and their prices for a particular security arrayed by strike price and maturity.

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Related Questions

Problem 2

The writer of a regular exchange-listed put-option on a stock:

Has the right to buy 100 shares of the underlying stock at the market price.

Has the right to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the exercise price.

Has the obligation to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the market price.

please really need some help with these questions

Problem 3

Suppose an investor have a put option. What will happen if the stock price on the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option. B. The seller will be obliged to buy stock from the owner of the option. C. The owner will not exercise his option.
D. The option will extend for nine more months.
E. None of the above options.

Problem 5

Suppose an investor sells one share of stock and buys a call option on the stock. What will be the value of her investment on the final exercise date if the stock price is above the exercise price? (Ignore transaction costs.)

A. The value of two shares of stock.
B. The value of one share of stock plus the exercise price. C. The exercise price.
D. The value of one share of stock minus the exercise price.

E. None of the above options.

Problem 9

All else equal, as the underlying stock price decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

Problem 10

All else equal, as the underlying stock volatility decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

You wrote eight call option contracts with a strike price of $37.50 at a call price of $1.10 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?

a) 2,240

b) 1,360

c) -2,240

d) -1,360

e) -1,760

The exercise price on one of ORNE Corporation's call options is $25 and the price of the underlying stock is $29. The option will expire in 35 days and is currently selling at $5.50. a. Calculate the option's exercise value? What is the significance of this value? b. Why is an investor willing to pay more than the exercise value for the option? c. If the price of the underlying stock changes to $33 per share, will the market value of the option increase, decrease, or remain the same? Why d. If Orne Corporation had issued a put option (instead of the call), would its value increase, decrease, or remain the same if the price of the underlying stock increased? Why?