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P1.T3.607. Mechanics of options: contract features (Hull)

David Harper CFA FRM

David Harper CFA FRM
Staff member
Learning objective(s): Describe the types, position variations, and typical underlying assets of options.


607.1. Hull explains that stock options in the United States trade on one of three cycles: the January, February or March cycle. Specifically, "The January cycle consists of the months of January, April, July, and October. The February cycle consists of the months of February, May, August, and November. The March cycle consists of the months of March, June, September, and December." (Hull 10.4 Specifications of Stock Options)

Assume the stock options on XYZ Corp are on a March cycle and today is August 3rd. The options of XYZ Corp will trade today with expiration dates in which of the following months?

a. September, December, March and June
b. August, September, October, and November
c. August, September, October, and December
d. August, September, December, and March

607.2. Robert purchases an equity option on a major trading exchange when the underlying share price is $96.00. Each of the following specifications is a plausible entry in the option contract EXCEPT which is not a contract specification or element?

a. Strike prices of $90.00, $95.00 or $100.00
b. Underlying: 100 shares of the equity security
c. Implied volatility: limited to 25.00% or the average of last twenty trading days
d. Exercise style: American; may be exercised on any business day up to and including on the expiration date

607.3. In regard to option mechanics, each of the following is true EXCEPT which is not?

a. A margin account is required when clients write (ie, sell) options but not when the buy options
b. An American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.
c. To hedge foreign exchange risk, a long binary option on the currency provides insurance that is identical to a short foreign exchange futures contract
d. While the exercise of an exchange-traded option typically does not cause dilution of the underlying company's equity, exercise of an employee stock option (ESO) typically does cause dilution