Test your basic knowledge |

Options Trading

Instructions:
  • Answer 50 questions in 15 minutes.
  • If you are not ready to take this test, you can study here.
  • Match each statement with the correct term.
  • Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.
1. A contract that gives the owner the right - if exercised - to buy or sell a security at a specific price within a specific time limit.






2. A measure of actual stock price changes over a specific period of time.






3. The estimated value of an option derived from a mathematical model.






4. A short stock position and a short put position.






5. Two or more trading vehicles packaged to emulate another trading vehicle or spread. Because the package involves different components - price is also different - but risk is the same.






6. These options can be exercised on any business dy prior to expiration and the settlement value will be based on the index close that day - settled in the cash equivalent of the amount in-the-money.






7. The part of an options total price that exceeds its intrinsic value. Price of an out-of-money option consists entirely of time value.






8. An option strategy in which call options are sold against equivalent amounts of long stock. ( writing 2XYZ Jan 50 calls while owning 200 shares of XYZ stock)






9. A position resulting from the sale of a contract or instrument that you do not own.






10. Interest rate at which brokerage firms borrow from banks to finance their clients' security positions. The call loan rate is sometimes used because the loans can be called on a 24-hour notice.






11. At the money






12. An option that has intrinsic value






13. An option strategy with limited risk and limited profit potential that involves both a long(or short) straddle - and a short (or long) strangle. (short strangle: buying 1 ABC May 90 call and 1 ABC May 90 put - and writing 1 ABC May 95 call and writin






14. A position resulting from the sale of a contract or instrument that you do not own.






15. Calculations performed on updated prices.






16. A compilation of the prices of several common entities into a single number; ex (S&P 100 Index).






17. An investment strategy that attempts to lower risk by buying securities that have offsetting risk characteristics. A perfect hedge eliminates risk entirely. Hedging strategies lower the return because there is a cost involved in reducing risk.






18. An investment strategy used by professional option traders in which a short put and long call with the same strike price and expiration are combined with short stock to lock in a price. (selling short 100 shares of XYZ stock - buying 1 XYZ May 60 cal






19. In a customer transaction - edge refers to the markup or markdown price that a market maker generates in the deal. It can be thought of as a tax charged by the market maker for services rendered.






20. Designated primary market maker.






21. Evaluating an options value through the use of a pricing model allows one to determine the theoretical value of the option(price you would expect to pay in order to break even)






22. Evaluating an options value through the use of a pricing model allows one to determine the theoretical value of the option(price you would expect to pay in order to break even)






23. A contract to buy or sell a predetermined Quantity of a commodity or financial product for a specific price on a given date.






24. An option created as the result of a special event such as a stock split - stock dividend - merger or spin-off taking place during the life of an option. ( adjusted option may cover more than the usual one hundred shares)






25. A strategy involving two or more options of the same type (or options combined with an underlying stock position) that will profit from a rise in the price of the underlying stock. Consists or selling an option with a higher strike - and buying an op






26. The total price of an option: intrinsic value plus extrinsic value






27. A strategy consisting of at least two components transacted simultaneously. The price relationship between each part - or 'leg -' could change based on a move in underlying price and or volatility. A spread is entered into with the expectation of eit






28. Designated primary market maker.






29. The price of an option less its intrinsic value. The entire premium of an out-of-the-money option consists of extrinsic value. This is often referred to as the time value portion of option premiums.






30. A strategy involving two or more options of the same type that will profit from a decline in the underlying stock. Consists of buying an option with a higher strike and selling an option with a lower strike. The maximum risk will be realized if the u






31. Procedure used by the options clearing corporation to exercise in-the-money options at expiration. (75 cents or more)






32. A position that will perform best if there is little or no net change in the price of the underlying stock.






33. Same as ask price






34. An option strategy that involves an out-of-the-money call and an out-of-the-money put. This is normally used as a long stock protective strategy when the call is sold and the put is purchased. The opposite of this strategy - called a 'fence -' could






35. A credit spread in which a rise in price of the underlying security will theoretically increase the profit value of the spread. (writing 1 XYZ Jan 55 put and buying 1 XYZ Jan 50 put)






36. The difference in the premium prices of two options - where the credit premium of the one sold exceeds the debit premium of the one purchased. A bull spread with puts and a bear spread with calls are examples of credit spreads.






37. Options contracts on the same class having the same strike price and expiration month. (all XYZ May 60 calls constitue a series.






38. An order to buy or sell at the last price on the close.






39. A short stock position and a long call position.






40. A long call butterfly is created by buying one call at the lowest strike price - selling two calls at the middle strike price - and buying one call at the highest strike price. (buying 1 ABC Jan 40 call - writing 2 ABC Jan 45 calls - and buying 1 ABC






41. A a feature of American-style options that allows the owner to exercise an option at any time prior to its expiration date.






42. A strategy involving two or more options of the same type (or options combined with an underlying stock position) that will profit from a rise in the price of the underlying stock. Consists or selling an option with a higher strike - and buying an op






43. The number of underlying shares covered by one option contract. (100 shares for one equity option)






44. Long-term equity anticipation securities are calls and puts with expiration's as long as two to three years.






45. Procedure used by the options clearing corporation to exercise in-the-money options at expiration. (75 cents or more)






46. An order that is designated to be executed on or before the expiration date. (all or none)






47. This formula can be used to calculate a theoretical value for an option using current stock prices - expected dividends - the option's strike price - expected interest rates - time to expiration - and expected stock volatility.






48. The sensitivity of theoretical option prices with regard to small changes in time. Theta measures the rate of decay in the time value of options.






49. An individual with the opinion that a security - or the market in general will decline in price; someone having a negative or pessimistic outlook.






50. A person who believes that a security - or the market in general - will rise in price; a positive or optimistic outlook.