Premium Income

### What is premium income? - [ ] Income from stock dividends - [x] Income received by an investor who sells a put option or a call option - [ ] Interest income from bonds - [ ] Earnings from mutual funds > **Explanation:** Premium income is the income received by an investor who sells a put option or a call option. It is the compensation for taking on the risk associated with the option contract. ### How is premium income typically taxed? - [ ] As long-term capital gains - [x] As short-term capital gains - [ ] As tax-free income - [ ] As dividend income > **Explanation:** Premium income is generally treated as short-term capital gains, which are subject to ordinary income tax rates. ### What is a call option in options trading? - [ ] An option to sell an underlying asset at a specified price - [x] An option to buy an underlying asset at a specified price - [ ] A contract that pays periodic interest - [ ] A fixed-income investment option > **Explanation:** A call option gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price within a certain time period. ### What factors influence the amount of premium income received? - [x] Strike price, expiration date, volatility, and market conditions - [ ] Only the current price of the underlying asset - [ ] Market movements and interest rates alone - [ ] Government policies > **Explanation:** The premium income received from selling options is influenced by the strike price, expiration date, volatility of the underlying asset, and current market conditions. ### What is a put option? - [x] An option to sell an underlying asset at a specified price within a certain time period - [ ] An option to buy an underlying asset at a specified price - [ ] A contract that earns interest over time - [ ] An insurance policy for stocks > **Explanation:** A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a specified price within a certain time period. ### Which of the following is a strategy used to earn premium income? - [ ] Short selling - [ ] Dollar-cost averaging - [x] Covered calls - [ ] Dividend reinvestment > **Explanation:** Covered calls involve holding a long position in an asset and selling call options on the same asset to generate premium income. ### What is the strike price in an options contract? - [ ] The current market price of the underlying asset - [x] The price at which the underlying asset can be bought or sold if the option is exercised - [ ] The future predicted price of the asset - [ ] The amount paid for the option > **Explanation:** The strike price is the fixed price at which the underlying asset can be bought or sold if the option is exercised. ### Why might an investor sell a put option? - [x] To generate premium income and possibly buy the underlying asset at a favorable price - [ ] To pay off existing debt - [ ] To increase portfolio volatility - [ ] To guarantee dividend payments > **Explanation:** An investor might sell a put option to generate premium income and, if the option is exercised, purchase the underlying asset at a potentially favorable price. ### What is the primary risk of selling options for premium income? - [x] Having to buy or sell the underlying asset at an unfavorable price - [ ] Paying high transaction fees - [ ] Missing out on dividend payments - [ ] Having too many assets in one sector > **Explanation:** The primary risk is that the option seller may have to buy or sell the underlying asset at an unfavorable price, leading to potential losses if the market moves significantly against their position. ### Are premium incomes from options trading ever considered tax-exempt? - [ ] Yes, always - [ ] Sometimes, if held for over one year - [ ] Only for nonprofit organizations - [x] No, they are generally not tax-exempt > **Explanation:** Premium income from options trading is generally not tax-exempt and is usually taxed as short-term capital gains.