An Options Quiz I

1.  Which day of the month is normally the last day on which standard equity option contracts can be traded?

a) The 20th.
b) The first Wednesday after the 15th of the month.
c) The third Friday of the month.
d) The Friday immediately before the third Saturday of the month.
e) The last Friday of the month.

2. Which event will generally cause the price of a call option to increase?

a) The passage of time.
b) An increase in the implied volatility of the contract.
c) A drop in the price of the underlying security.
d) An increase in the risk-free interest rate.
e) None of the above.

3. If the market for a security is efficient, which of the following should never occur?

a) Expected rate of return on the security is less than the risk-free interest rate.
b) Price of the security doubles in less than one month.
c) A portfolio with an identical cash flow can be created with a lower total price.
d) Highest bid for the security is greater than the lowest ask.
e) Both (c) and (d).

4. A European-style options differs from an American-style options in what way?

a) European-style options can only be exercised on their date of expiration, while American-style options can be exercised on any date prior to their date of expiration.
b) European-style options can be exercised on any date prior to their date of expiration, while American-style options can only be exercised on their date of expiration.
c) European-style options are traded in euros, while American-style options are traded in dollars.
d) European-style options are only traded in increments of five cents, while American-style options are traded in one cent increments.
e) European-style options are traded on commodities, currencies, and interest rates, while American-style options are traded only on corporate equity.

5. Options differ from a futures in what way?

a) Futures can be held as investments, while options can only be used for trading.
b) Short positions cannot be held on options, but they can on futures.
c) "Futures" and "options" are just different names for the same thing.
d) Futures can only be traded on very large positions in the underlying security or commodity, while options can be traded on relatively small amounts.
e) Futures are always settled at expiration, but options are settled only at the owner's discretion.

6. If on the 1st of October, the exchange-traded option contracts available for a particular stock have expiration months of October and November; January, February, and May of the following year; and January of the second following year, then on the 1st of November the following expiration months will probably be available for exchange-traded options contracts on the stock:

a) October, November, and December; January, February, and May of the following year; and January of the second following year.
b) November; January, February, and May of the following year; and January of the second following year.
c) November and December; January, February, March, and May of the following year; and January of the second following year.
d) November and December; January, February, and May of the following year; and January of the second following year.
e) November and December; January, February, May, and August of the following year; and January of the second following year.

Answers:

1(c), 2(b), 3(e), 4(a), 5(e), 6(d)