Options Education. Quiz Answers

Answers to yesterday's quiz

1) You were assigned, and now own 500 shares.

When an option finishes in the money by any amount, the option is automatically exercised. (An absurdity in my opinion).

The only way you can prevent being assigned an exercise notice is to sell the option or notify your broker (immediately after the close on expiration Friday) that you DO NOT want to exercise an option that is in the money.2) Congratulations.  You have $40,000 in your account.You needed worry about the person from whom you bought the options.  Your relationship with the seller is severed immediately after the trade takes place.  The Options Clearing Corporation (OCC) steps in and guarantees that the contract will be honored.Things being as they are today, it's worth mentioning that the OCC has never (36+ years) allowed an option go into default.

2) Updated;  now includes answer #2

You have $40,000 in your account.

The OCC (options Clearing Corporation) guarantees that all option contracts are honored.  When you buy or sell an option, you are immediately separated from the specific individual with whom the trade was executed.

The OCC takes over and acts as the buyer and seller of each trade to guarantee that there is never a default.  You can rest assured that any trade you made will be honored.

If that other person has gone broke, it's up to his/her broker to try to recover the money from that specific trader.  You, the person on the other side of the trade, are 100% protected.

3) Buy 25 Aug 45 calls.  At expiration, they are worth $500 apiece, or $12,500.

Five Aug 30 calls are worth $2,000 per, or $10k

11 Aug 35 calls are worth $1,000each, or $11k

The Aug 50 calls are worthless.  But, if you were aware that they could have been worth a significant amount – depending on how rapidly the stock price increases, that's good.  It's possible that these were the calls to buy. 

Because you don't know if the option price ever moved high enough to generate a good profit, the 'correct' answer is 'Aug 45 calls.'  Buying the Aug 50 calls is not 'wrong' – it's just a big gamble.  Why do than when you get turn your dream into a guaranteed $11,500 profit?

***

I frequently receive junk e-mail from The Book of the Month Club.  The subject is always: "the best option for book-lovers'

I'm always hoping to see a slight change: "the best option book for book-lovers: The Rookie's Guide to Options"

425



5 Responses to Options Education. Quiz Answers

  1. Tom Clark 08/21/2009 at 6:43 AM #

    Mark,
    How about sharing the results of your quiz, i.e. Number responed and % for each answer? I’d like to see how I did compared to you other readers.

  2. Mark Wolfinger 08/21/2009 at 9:34 AM #

    Good idea.
    1) Like quizzes?
    2% never
    44% yes
    54% once in awhile
    2) Options expired worthless: 100%
    3) I’m out of luck: 100%
    4) Which call to buy
    Aug 30 calls: 29%
    Aug 40 calls: 2%
    Aug 45 calls: 49%
    Aug 50 calls: 20%
    I must admit I’m surprised.

  3. greg 08/21/2009 at 3:18 PM #

    not sure that the poll is giving you the correct data. I certainly voted differently in the two 100% answer.

  4. Mark Wolfinger 08/21/2009 at 8:31 PM #

    Thank you. I’m actually glad to hear that.
    I’ll see what I can learn from the polling company!!!

  5. Dave 08/22/2009 at 1:27 AM #

    My votes were also recorded in error.