FINANCE-The company is issuing an additional share for each

QUESTION

Module 2 Questions

When a stock splits 2:1, what happens to its options?

The
company is issuing an additional share for each one currently outstanding, and
the share price is consequently cut in half. Stockholders thus retain the same
percentage ownership in XYZ Corp. after the split as before. But the holder of
an unadjusted call option on XYZ would have the right to buy 100shares that
represent only half as much ownership in the company as before. The terms of
option need to change to reflect the change in the underlying stock. On the
effective date of the split, both holders and writers of existing options on
the stock would have the number on their contracts doubled and strike prices of
these contracts halved.
After a 2-1 stock
split, the number of outstanding shares doubles and the par value per share
decreases by half. Retained earnings are not affected.

When a stock trading at $80 issues a $.32 quarterly
dividend, what happens to its options?

The
options are going down.

If in January, a particular stock has options open that
expire in January, February, May, and August, which expiration cycle is
this stock in?

Quarterly
cycles.

On the CBOE, the Exchange employee that keeps “the
book” on a particular option is called the _______.

Order
Book Official (OBO).
Use this information for questions 7 and 8: XYZ stock is halted at 2 p.m. Eastern time for
news pending and does not reopen for trading that day.

How does this affect the XYZ options?
Can XYZ options be exercised that day?

Use this information for questions 9 through 11: ABC stock runs from 36-41 on big news.

It is December 18, and the ABC Jan 40 calls are now
trading at $2.30. Is this option likely to be exercised now? Explain.
If eight of these options were originally purchased at
$.85 less than one month ago, and are now sold at the current price, what
is the tax liability thus created from this trade?
If four of these options were originally sold at $.85
against 400 shares of stock and the stock is called away in January at the
strike price, what is the tax liability to the seller?

Use the.cboe.com/TradTool/OptionCalculator.asp”>CBOE options calculator for questions 12 through 15.

Determine the price of a call option on YYY if the
stock is at 32.46, the strike is 35, the volatility is 46 percent, the
interest rate is 5 percent, and there is no dividend, with 50 days to go
before expiration.
If the stock went up 3 points on this day, what would
the option be theoretically worth?
If the underlying stock had a volatility of 25 percent
instead of 46 percent, what would the original call be worth?
An option is trading at 2.50 with the original
parameters but a longer expiration. How many days are there till
expiration for this longer option?
Buying or selling an option that is considered
“substantially identical” to its underlying security two days
after selling the underlying security is subject to what common IRS rule
for securities taxation?

Write about a hypothetical situation in which
stock XYZ last traded at 23.75 and someone owning a call option for XYZ at
25 decides it is worth exercising. (In other words, they are willing to
pay more for the stock than the price it last traded at.)

ANSWER:

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