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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. 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.






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






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






4. A type of order that requires that the order be executed completely or not at all.






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






6. The total number of outstanding option contracts in a given series






7. 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.






8. 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






9. The sensitivity of theoretical option prices with regard to small changes in interest rates. Increases in interest rates lead to higher call values and lower put values. Lower interest rates do the opposite.






10. 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.






11. 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






12. A long put butterfly is established by buying one put at the lowest strike price - writing two puts at the middle strike price - and buying one put at the highest strike price.






13. A prolonged period of falling prices. A bear market in stocks is usually brought on by the anticipation of declining economic activity.






14. Process by which the holder of an option notifies the seller of intention to take delivery of the underlying in the case of a call - or make delivery in the case of a put - at the specified exercise price.






15. An investment strategy in which stock is purchased and call options are written on a greater than one-for-one basis.More calls written than the equivalent number of shares purchased.






16. An option on shares of an individual common stock.






17. 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.






18. The purchase or sale of an equal number of puts or calls with the same underlying - stike price - and expiration.






19. An investment strategy in which a long put and a short call with the same strike price and expiration are combined with long stock to lock in a nearly risk-less profit. (by purchasing 100 shares of XYZ stock at 50 - writing 1 XYZ Jan 50 call - and bu






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






21. An option that can be exercised only at expiration. Usually expire the third Friday of every month






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






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






24. A strategy that profits from a stock price decline. It is initiated by borrowing stock from a broker -dealer and selling it in the open market. This strategy is closed (covered) at a later date by buying back the stock and turning it to the lending b






25. A market drop in the price of a security






26. Options that may be exercised on or before the expiration date.






27. The simultaneous purchase and sale of options of the same class at different strike prices - but with the same expiration date. (ABC April 150/155 call spread. you purchase the ABC Apr 150 call and sell the ABC Apr 155 call). similar to the outright






28. 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






29. 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.






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






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






32. A short call position and a long put position.






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






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






35. Fill-or-kill order






36. An order that is designated to be executed on or before the expiration date.






37. 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.






38. Good Til Cancel






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






40. 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.






41. Calculations performed on updated prices.






42. 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.






43. 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






44. At the money






45. The stock price(s) at which an option strategy results in neither a profit nor a loss.






46. 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.






47. An option strategy that is neither bullish nor bearish.






48. 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)






49. 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.






50. The month during which the expiration date occurs