Series 4 Example Questions
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Sample Questions
1)
In November, a customer buys 1 ABC Jan 70 Call @ $4 when the market price of ABC is 71. If ABC falls to $67 and stays there through January, the customer will:
A ) Gain $400
B ) Lose $400
C ) Gain $6,700
D ) Lose $6.700
See Answer
Answer: The Best Answer is B
Feedback: The holder of a call pays the premium for the contract. This is the maximum loss if the contract expires "out the money."
2)
"Intrinsic value" is defined as the:
A ) excess of premium over the underlying security's market price
B ) excess of time premium over the "in the money" amount
C ) difference between the strike price and market price of the underlying security, if exercise is profitable to the holder
D ) maximum potential gain on a contract
See Answer
Answer: The Best Answer is C
Feedback: Intrinsic value is the amount by which an option contract is "in the money." It is the difference between the market price and exercise price if exercise is profitable to the holder.
3)
The sale of covered calls is used to:
A ) hedge a long stock position in a falling market
B ) protect a short stock position in a falling market
C ) generate additional income in a stable market
D ) profit if the market drops
See Answer
Answer: The Best Answer is C
Feedback: Covered call writing is used to generate extra income from a long stock position in a stable market
4)
Which of the following strategies has unlimited loss potential?
A ) long stock/short call
B ) long stock/long put
C ) short stock/long call
D ) short stock/short put
See Answer
Answer: The Best Answer is D
Feedback: With a long stock position, the maximum loss is the value of the stock. With a short stock position, the potential loss is unlimited. If a long call is purchased against a short stock position, the upside loss is limited. If a short put is sold against a short stock position the upside loss is still unlimited since in a rising market the short put will expire "out the money." The short stock position must be covered by purchasing the stock at the higher market price - and the price can rise an infinite amount.
5)
Which position is profitable in a rising market?
A ) bear put spread
B ) bull call spread
C ) short straddle
D ) short naked call
See Answer
Answer: The Best Answer is B
Feedback: A bull call spread is profitable in a rising market. A bear put spread is profitable in a falling market, as is a short naked call. A short straddle is profitable in a flat market.