Question

Aa Aa 11. Option contracts terms Option Contracts Terminology and Definitions Learning about option contracts includes learning words you're probably familiar with but are being used in new ways to discuss options. Make sure you understand the terminology by answering the following questions: True or False: Shannon holds an option contract written by Paula. Shannon notified Paula that she decided to exercise her option. Paula has the option to refuse to act on Shannon's decision True False True or False: When Shannon bought the option from Paula, she paid Paula a fee called a premium True False True or False: Paula wrote the option and owns the underlying stock. Paula wrote a covered option O False True True or False: Nina holds many options. If she decides to exercise any of them, the transaction will be at a price Nina thinks is fair True False True or Fase: Valentina holds a call option. If she exercises her option, Valentina will sell the optioned asset. False True True or False: Valentina let her option contract expire without exercising the option. The option writer, Paula, profited from the contract while Valentina did not profit from it. False True

Answer 1

Solution 1: False

As Shannon is the option holder, she has a right to exercise the option and Paula being an option writer is obligated to buy or sell the asset and cannot refuse the decision of the option holder.

Solution 2: True

When an option is purchased, the option holder has to pay a fee to the option writer. This fee is called as premium.

Solution 3: True

A covered call option occurs when the investor owns the underlying asset and writes a call so that the underlying is on hand to sell to the option holder if the option is exercised.

Solution 4: False

Nina being an option holder will have a right to exercise her options. However, the transaction will take place at a price decided at the time of purchasing the option. This price is called as the Strike Price or Exercise Price

Solution 5: False

As Valentina holds a Call option, she has a right to buy an asset from the option writer at a price called Strike Price or Exercise Price.

Solution 6: True

If the option expires, the option writer Paula will profit as she has already received the premium from the option holder Valentina. And Valentina will suffer a loss equal to the premium amount paid.