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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. Another name for calendar spread.






2. 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.






3. The month during which the expiration date occurs






4. A contract between a buyer and seller whereby the buyer acquires the right - but not the obligation - to buy a specified underlying instrument at a fixed price on or before a specified date.






5. The highest price a dealer is willing to pay for a security at a particular time.






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






7. Term used to describe how the theoretical value of an option 'erodes' or reduces with the passage of time. Time decay is specifically quantified by Theta.






8. A delta-neutral spread composed of more long options than short options on the same underlying instrument. This position generally profits from a large movement in either direction in the underlying instrument.






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






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






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






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






13. A term describing one side of a spread position. A trader who legs into a spread establishes one side first - hoping for a favorable price movement so the other side can be executed at a better price.






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






15. Commodity trading advisor.






16. An option strategy that generally involves the purchase of a farther-term option (call or put) and the selling (writing) of an equal number of nearer-term options of the same type and strike price. (buying 1ITI May 60 cal[ far term portion of spread]






17. 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)






18. Investment strategy that has a similar risk/reward profile as another investment strategy. (a long May 60-65 call vertical spread is equivalent to a short May 60-65 put vertical spread).






19. 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






20. Third Friday of expiration month






21. Another name for calendar spread.






22. A trading technique that involves the simultaneous purchase and sale of identical assets traded on two different exchanges with the intention of profiting by a difference in price between exchanges.






23. The time of day by which all exercise notices must be received on the expiration date.






24. The purchase or sale of an equal number of puts or calls with the same underlying and expiration - but different strike prices.






25. A measure of the volatility of the underlying security - derived by applying current prices rather than historical prices.






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






27. The purchase or sale of an equal number of puts or calls with the same underlying and expiration - but different strike prices.






28. The interest expense on money borrowed to finance a margined securities position.






29. 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.






30. Calculations performed on updated prices.






31. The use of money to create more money through an appreciating or income-producing asset.






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






33. A graphical representation of the estimated theoretical value of an option at one point in time - at various prices of the underlying stock.






34. A strategy involving four options and four strike prices - and that has both limited risk and limited profit potential. A long call condor spread is establish by buying one call the lowest strike - writing one call at the second strike - writing anot






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






36. A debit spread in which a rise in the price of the underlying security will theoretically increase the value of the spread. (buying 1 XYZ Jan 50 call and writing 1 XYZ Jan 55 call)






37. The risk that a change in the interest rates will negatively affect the value of an investor's holdings; generally associated with bonds - but applying to all investments






38. Fill-or-kill order






39. A strategy involving four options of the same type that span three strike prices. The strategy has both limited risk and limited profit potential.






40. 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






41. Same as ask price






42. A strategy involving four options of the same type that span three strike prices. The strategy has both limited risk and limited profit potential.






43. 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.






44. An option position that involves the purchase/sale of a call and the sale (purchase of a put on the same underlying strike with the same expiration. Can also be referred to as any set of multiple purchases and sales of options.






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






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






47. 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






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






49. 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






50. An open short option position that is offset by a corresponding stock position on a share-for-share basis. This ensures that if the owner of the option exercises - the writer of the option will not have a problem fulfilling the delivery requirements.