Options Class

Hey guys taking an options course and I'm struggling with the following questions:

1) To hedge a long position in YHOO, a customer can do all of the following except:
A) Buy to open at the money IBM puts
B) Buy to open in the money IBM puts
C) Sell to open out of the money IBM calls
D) Sell to open in the money IBM puts
E) All of the above

2) Which of the following is NOT a primary component in theoretical option pricing calculation?
A) Annual Interest Rate
B) Quarterly Dividend Amount
C) Change in Volatility
D) Strike Price
E) Days to Expiration

3) A call writer hoping to benefit from the time decay of the options premium would use which of the following measures?
A) Theta, expressed in percentage
B) Theta, expressed in dollars
C) Delta, expressed in percentage
D) Delta, expressed in dollars

 

1 D - selling a put is a bullish position, so with it you are not hedging a long stock position, but actually adding to it.

2 C - volatility is a primary component, change in volatility is not.

3 B - Theta is a measure of time decay, which is usually expressed in dollars.

 

MTE, he is taking a portfolio margin test, I already sent him a PM.
You are correct for #2 because the question is worded incorrectly but Penson wants you answer B – I know that doesn’t make sense but I guess that is their definition of “primary”.

 

The answer to all is INDEX

(it's found in the back of the book)

 

Fair enough.

 

I would have picked E. I don't know what ANY option position in IBM would have on a long position in YHOO

 

Good catch. I didn't pay attention to the tickers.

 

On second thought, given that IBM and YHOO do have a positive correlation it is theoretically possible to at least partially hedge a YHOO long stock position with IBM options.

 

I agree #2 is probably one of the most poorly worded questions I've ever taken on any exam ever. I initially thought it was change in vol also but then realized its the annual dividend that is an input into the pricing model, not QUARTERLY dividend, as companies can issue different quarterly dividends throughout the year.

 

Not necessarily, you can input discreet dividends into a pricing model. Besides, you only need the dividends that are paid during the life of the option, you don't need an annual dividend to price a 1-month option.