Question

1. Indicate which statement is True (T) or False (F).

1. _____When making a market on an option the bid is less than the offer.
2. _____If the stock price is greater than the strike price the call option is “out-of-the money”
3. ______ Puts and Calls leverage profits and losses.
4. ______ For the same stock and strike price an option with a more distant expiration will be worth less than an option with a nearer expiration.
5. ______ A straddle involves both calls and puts of the same expiration and strike.
6. ______ Short a Put is “bearish”.
7. ______The “butterfly” involves both calls and puts.
8. ______An out of the money option has no “intrinsic value”.
9. ______ The greater the price of the stock the greater should be the price of a call option.
10. _______ The lesser the price of stock the lesser should be the price of a put option.

Answer 1

a. FALSE

When making a market on an option the bid is greater than the offer. This difference is the profit to market maker

b. FALSE

The call option is said to be "in-the-money" when the stock price is greater than the strike price. For the call option to be out of the money, the stock price has to be lower than the strike price

c. TRUE

Options are leveraged instruments. So, Puts and Calls leverage profits and losses.

d. FALSE

The more distant expiration options are worth more than the near expiration options because of time value in options.

e. TRUE

A straddle is constructed by using both call and put of the same expiration and strike of equal quantities.

f. FALSE

A short put is a "bullish" strategy

g. FALSE

A butterfly involves either calls or puts, not both

h. TRUE

An out of the money option has no “intrinsic value”. It has only time value

An in the month option may have both intrinsic value and time value

i. FALSE

The greater the price of the stock the lower should be the price of a call option.

j. FALSE

The lesser the price of stock the greater should be the price of a put option.