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Quiz 4

Covered Calls | The Basics

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Question 1 of 10

If Craig buys a call, and at expiration, the market price of the stock is below the strike price of this call, what happens to his call?

A

The call is exercised and the holder of the call buys 100 shares

B

The call expires worthless (He bought the rights to buy shares at a specific strike price. If the market price is below the strike price at expiration, the call he bought becomes worthless. Think about it: why would anyone want to buy at the strike price if that strike price is higher than the current market price? You can just go straight to the market to buy the shares.)

C

The call is returned to the seller and the premium is refunded

D

The call is exercised and the premium is refunded

Question 2 of 10

Gains from sale of stock are known as

A

Total gains

B

Capital gains

C

Positive gains

D

Net gains

Question 3 of 10

On Monday, Ally buys 100 shares of XYZ for $100 per share and sells to Craig a covered call at a strike price of $105, for a premium of $40, and with an expiration for this Friday. At expiration on Friday, XYZ closes at $101. What is Ally's gain/loss? What about Craig's?

A

Ally loses $260, Craig loses $40

B

Ally gains $300, Craig loses $260

C

Ally loses $260, Craig gains $260

D

Ally gains $40, Craig loses $40

Question 4 of 10

On Monday, Ally buys 100 shares of XYZ for $100 per share and sells to Craig a covered call at a strike price of $105, for a premium of $40, and with an expiration for this Friday. At expiration on Friday, XYZ closes at $107. Ally's shares get called away to Craig and he sells the shares at market price. What is Ally's gain/loss? What about Craig's?

A

Ally loses $160, Craig gains $500

B

Ally gains $540, Craig gains $160

C

Ally gains $160, Craig gains $540

D

Ally gains $40, Craig loses $40

Question 5 of 10

Consider the following scenario: You sell a covered call for company XYZ, trading at $50 per share, for a premium of $30. The strike price is $53 and the expiration is this Friday. Once Friday rolls around, XYZ closes at $55. What happens to the covered call you sold?

A

You are forced to sell 100 shares of XYZ for $53 per share and you keep the $30 premium

B

You are forced to sell 100 shares of XYZ for $53 per share and you lose the $30 premium,

C

The covered call expires worthless and you keep the $30 premium

D

The covered call expires worthless and you lose the $30 premium

Question 6 of 10

Consider the following scenario: You sell a covered call for company XYZ, trading at $50 per share, for a premium of $30. The strike price you choose is $53 and the expiration is this Friday. Once Friday rolls around, XYZ closes at $52. What happens to the covered call you sold?

A

You are automatically forced to sell your 100 shares of XYZ for $52 per share

B

The option expires worthless and you return the $30 premium to the buyer

C

The option expires worthless and you keep the $30 premium

D

The option is exercised and you owe the buyer the $30 premium they paid you

Question 7 of 10

The listings, or catalog, for options is commonly known as the

A

Options market

B

Over-the-counter options store

C

Options exchange

D

Options chain

Question 8 of 10

The price someone pays to own the covered call you sold to them is commonly known as the

A

Premium

B

Investment income

C

Cash money

D

Agreement price

Question 9 of 10

Why is a call option "covered"?

A

The call you sell is covered by cash

B

The call you sell is covered by your signature

C

The call you sell is covered by 100 shares of the underlying stock

D

The call you sell is covered by the brokerage you trade with

Question 10 of 10

The last day in which an options contract can be exercised is commonly known as the

A

Expiration date

B

Contract due date

C

Ex-dividend date

D

Closeout date

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