SIE Options and Derivatives 2

Question 1

What is the intrinsic value of a call option with a $50 strike price when the stock is trading at $55?

Accepted Answer

$5

Answer

Intrinsic value for a call equals stock price minus strike price when in the money: $55 - $50 = $5.

Question 2

A futures contract obligates the buyer to:

Accepted Answer

Purchase the underlying asset at a specified price on a future date

Answer

Unlike options, futures contracts create a binding obligation to buy the underlying asset at the agreed price on the delivery date.

Question 3

What is a 'naked' (uncovered) call option?

Accepted Answer

Selling a call without owning the underlying stock

Answer

A naked call is written (sold) without owning the underlying shares, creating theoretically unlimited risk if the stock rises sharply.

Question 4

Which options strategy profits when the underlying stock remains relatively flat?

Accepted Answer

Short straddle

Answer

A short straddle (selling both a call and a put at the same strike) profits from low volatility when the stock stays near the strike price.

Question 5

At expiration, an option that is 'out of the money' will typically:

Accepted Answer

Expire worthless

Answer

An out-of-the-money option has no intrinsic value at expiration and will expire worthless, causing the buyer to lose the premium.

SIE - Securities Industry Essentials Practice Test