Question

7. Which of the following statements about an American call option is not true?

a.         its time value decreases as expiration approaches

b.         its maximum value is the stock price

c.         it can be exercised prior to expiration

d.         it pays dividends

e.         none of the above

8. Under what circumstances can the writer of a call option expect to profit?

a.         stock price declines

b.         stock price remains the same

c.         the increase in stock price is less than the speculative premium

d.         all of the above

9. If you write a call option against shares of stock that you do not own, you have created a?

a.         naked option

b.         out of the money option

c.         in the money option

d.         premium

e.         covered option

Answer 1

7. Its e= none of the above.

Call option premium=intrinsic value+time value.

As the time passes and option comes closer to the expiration, the chances of incease in the stock price above the strike price mitigates. Hence, time value decreases as expiration approaches.

The maximum value of an american call option is its trading price. The higher it goes, the more option buyer benefits

Unlike European options, American options can be excercised before the expiration. These calls also pays dividends.

8. Its d=all the above

If you are the writer of an option, actually you are bearish on the share atleast for some specific time period. If you buy a share at $100 and expecting to fall in next three months,you can write the option to an option buyer where you will get a fixed premium on that. For example you get into contract with a strick price of $103.The stock price should go above so that the option buyer will excercise that. If share price falls or at same price,if incraese in the price less than the premium,the contract will not be excercised by the option buyer.

9.Its a=naked option

Those who write a call option with underlying assets, the option is called as naked option