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Answer: Options on individual equities are typically American-style, while many options on indices are European-style.
**A is correct.** Options on individual equities are American-style (can be exercised at any time before expiration) and options on indices are mostly European-style (can only be exercised at expiration). **B is incorrect.** Options on individual equities are physically settled (delivery of actual shares), while options on indexes are cash settled (cash payment based on index value). **C is incorrect.** Stock splits and dividends do affect option contract terms - stock splits will change the strike price and number of contracts, and dividends can affect option pricing. **D is incorrect.** CBOE offers weekly options only for the near-term (typically next month), while longer-term options are offered on monthly or quarterly expirations, with LEAPS (Long-term Equity AnticiPation Securities) available for maturities up to 3 years.
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An analyst at a wealth management company is researching derivative products offered by the Chicago Board Options Exchange (CBOE). The analyst examines the specifications of options offered on individual equities and compares them to options on equity indices. Which of the following is most likely correct regarding option specifications at the CBOE?
A
Options on individual equities are typically American-style, while many options on indices are European-style.
B
Options on both individual equities and indices are physically settled by delivering the underlying asset.
C
The terms of equity option contracts do not change as the price of the underlying asset changes due to stock splits or dividends.
D
CBOE offers index options that mature at the end of each week for the next 12 months.
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