Series 3 — National Commodity Futures Exam — All Questions
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The buyer of a call option on a futures contract has the right to:
- a.Go long the underlying futures at the strike price✓
- b.Go short the underlying futures at the strike price
- c.Require the writer to deliver the physical commodity immediately
- d.Collect the premium from the writer
A call gives its buyer the right to buy, meaning to establish a long futures position at the strike price. A put gives the right to go short. The premium flows from the buyer to the writer, not the reverse.
What is the maximum loss for the buyer of a put option on futures?
- a.Unlimited
- b.The premium paid for the option✓
- c.The strike price times the contract size
- d.The initial margin on the underlying futures
An option buyer can never lose more than the premium paid, regardless of how the market moves. This defined, limited risk is a key reason hedgers and speculators buy options instead of trading futures outright.
A call option on futures with a strike price of 50 is trading while the underlying futures price is 56. The option is:
- a.Out of the money by 6
- b.At the money
- c.In the money by 6✓
- d.Worthless because it has no time value
A call is in the money when the futures price is above the strike. Here 56 minus 50 gives 6 points of intrinsic value, so the call is in the money by 6. Any premium above 6 would be time value.