Dakota State University
BUS 418 Financial Futures & Options
Spring 2001
Reading Assignments
Chapter 10: All except pp. 297-300 Chapter 11: Pp. 304-316, 337-339
Objectives
Chapter 10: The Options Market
* 1. Define call option.
* 2. Define put option.
3. State what CBOE stands for.
4. State the year in which the CBOE was established.
5. State several advantages of having organized exchanges for
trading options.
6. State several other exchanges on which options are traded.
7. State the exchange with the greatest share of option volume.
8. State the relative number of calls versus puts traded.
9. State four types of assets on which options exist.
10. State the type of asset on which the most options exist.
11. State the two purposes for trading options.
*12. State the big advantage of options over futures.
13. State a big consequent disadvantage of options relative to
futures.
*14. Define the following option terms:
a) premium
b) exercise price
c) strike price
d) expiration date
e) in-the-money
f) out-of-the-money
g) at-the-money
15. Describe the following type of options trader:
a) market maker
b) floor broker
c) order book official
d) off-floor trader
16. Describe the following type of options order:
a) market order
b) limit order
c) good-till-cancelled order
d) day order
e) stop order
*19. State the three ways in which an option position can be
closed.
*20. State the approximate percentage of options positions which
are closed by offsetting, by expiration, or by exercise.
21. State the approximate commission for trading an options
contract.
22. State the main regulatory agency involved in options
trading.
23. Given an options quotation from the Wall Street Journal,
state what each number in a line means and calculate the
actual cost of a stock option contract.
24. Explain what is meant by the intrinsic value component
of an option price and the time value component of an option price.
*25. Calculate the intrinsic value and time value of a call or
put given its quotation from the Wall Street Journal.
26. Explain what LEAPS are.
Chapter 11: Option Payoffs and Option Strategies
27. State the value of an option at expiration.
*28. Give a profit/loss diagram, with appropriate axes, scales,
comments, indications of exercise price, stock price,
breakeven stock price, and potential losses and gains, for
the following situations:
a) buy stock
b) sell stock short
c) buy a call
d) write a naked call
e) buy a put
f) write a put
29. Explain what writing a naked call means and why this is very
risky.
30. Explain what writing a covered call means and why this is
less risky than writing naked calls.
31. Explain what is meant by a protective put and why they are
used.
*32. Give a diagram for the profit/loss expectations for a call
on a stock with a superimposed relative probability
distribution for the stock price at expiration, assuming
the exercise price was equal to the current stock price
when written.
33. State the relative profit/loss experience of buyers of calls
vs. writers of calls in practice.
34. Explain how buying a call can protect a short position.
35. State how much "margin" an option buyer must up to buy an option.
36. For the writer (seller) of an option state:
a) what happens to the option premium paid by the buyer during
the life of the option contract
b) whether the writer must put up margin in addition to the
option premium and an example of how much more
c) why the writer must put up margin in addition to the option
premium
[Unit Three Study Guide in Word format]
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Last update: April 10, 2001