Options - Summary And Review

An option is a contract that grants its owner the right, but not the obligation, to make a transaction in an underlying commodity or security at a certain price within a set time in the future. Calls and puts are the building blocks of options strategy. They can be combined, sometimes with positions in underlying commodities, to form options spreads or synthetic instruments.


CFTC rules allow for the side-by-side trading of futures and options on futures on the same exchange. SEC regulations proscribe exchange-traded options and the underlying on the same exchange, by contrast. Options on futures allow investors to manage risk at one remove from the underlying where obligation to enter into contracts is symmetrical. Options permit holders to buy or sell the underlying, whereas writers (sellers) are obligated to satisfy the terms of the option. Options on futures add considerably to the risk management opportunities of futures investors.

  1. An out-of-the-money option's intrinsic value is:
    1. Its strike price minus is spot price
    2. Its spot price minus its strike price
    3. Its premium price
    4. $0
  2. 1 MNO May 20 put @ 2. At which spot price(s) would the long put be in-the-money?

I. $16

II. $18

III. $22

IV. $24

a. I only

b. I and II

c. III and IV

d. IV only

  1. Which TWO are bullish option strategies?

I. Writing covered calls above market

II. Writing covered calls below market

III. Writing uncovered puts

IV. Writing uncovered calls

a. I and III

b. I and IV

c. II and III

d. II and IV

  1. Which statement is TRUE about writing covered calls?
a. It is a risk-free strategy

b. Physical delivery is not required upon exercise.

c. The writer must have cash on deposit equal to the cost to purchase the shares from the option holder.

d. It is a bearish strategy.

  1. A call bull spread:
    1. benefits the investor when the basis narrows.
    2. is an example of a calendar spread.
    3. consists of buying an in-the-money call and selling an out-of-the-money call.
    4. has no downside limit if the underlying commodity goes to $0.

  2. A strangle differs from a straddle in that the latter strategy uses different strike prices.
    1. True
    2. False

  3. All of the following strategies are bullish except
    1. Writing puts
    2. A credit put spread
    3. Short futures
    4. Long shares.

  4. An investor puts on a straddle trade if he is sure of the market's direction
    1. False
    2. True

  5. In a debit call spread, the breakeven price is
    1. The strike price minus the net premium
    2. The strike price plus the net premium
    3. Net premium in excess of the higher options's strike price.
    4. The net premium below the lower option's strike price.
  6. A synthetic long call consists of
    1. Long futures
    2. Short futures plus long put.
    3. Long futures plus long put.
    4. Long futures plus short call
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