A. A six-month S&P 500 index call option has an exercise price of 1,500. The hol

Question

A. A six-month S&P 500 index call option has an exercise price of 1,500. The holder of the option
exercises the call when the index is at 1,520. The settlement procedure for the S&P 500 index
option requires the writer of the option to ____________ to the holder of the option.
a. deliver an S&P 500 index ETF
b. make a payment of 20 times $100
c. make a payment of $1,520
d. make a payment of 1,520 times $10

B. An investor buys a three-month XCEL call option contract for a premium of $4 per share. The
exercise price is $20. The current price of XCEL stock is $23 per share. The investor holds the
option until the expiration date when XCEL stock sells for $25 per share. What is the rate of
return for this investment?
a. 0%
b. 25%
c. 50%
d. 100%

C. In order to guarantee option contract performance, the Option Clearing Corporation (OCC)
______________.
a. requires option holders, but not option writers, to post margin
b. allows writers of put options to satisfy margin requirements by holding the underlying
stock in a brokerage account
c. requires increased margin from the writer of in-the-money options compared to out-ofthe-
money options
d. all of the above statements are true about option margin requirements

Explanation / Answer

1.

The Option excercised at index level of 1,500. Index value at begining is 1,520. Since, excercise value is less than begining index value. So index must be excercised.

Difference between index value at begining and excercised price is 20. So, The settlement procedure for the S&P 500 index option requires the writer of the option to make a payment of 20 times $100 to the holder of the option.

Option (B) is correct answer.

2.

Total Premium paid = $4.

Gain from excercise the option = $25 - $20 - $4

= $1

Gain from excercise the option is $1.00.

Percentage gain = $1 / $4

- 25%.

Percentage gain from excercise the option is 25%.

Option (B) is correct answer.

c.

In order to guarantee option contract performance, the Option Clearing Corporation (OCC) allows writers of put options to satisfy margin requirements by holding the underlying
stock in a brokerage account.

Option (B) is correct answer.

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