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. Third Friday of expiration month






2. At the money






3. The risk to an investor that the stock price will exactly equal the strike price of a written option at expiration. (risk to be pinned with stock)






4. Term used to describe the ownership of a security - contract - or commodity that grants the owner the right to transfer ownership by sale or gift.






5. Good Til Cancel






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






7. 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.






8. 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.






9. Constructin a portfolio to match the performance of a broad-based index - such as the S&P 500. Individuals can do this by purchasing shares in an index mutual fund.






10. 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.






11. 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.






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






13. 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.






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






15. The risk to an investor that the stock price will exactly equal the strike price of a written option at expiration. (risk to be pinned with stock)






16. Constructin a portfolio to match the performance of a broad-based index - such as the S&P 500. Individuals can do this by purchasing shares in an index mutual fund.






17. The instrument (stock - future - or cash index) to be delivered when an option is exercised.






18. Third Friday of expiration month






19. 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






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






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






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






23. 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.






24. An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly.






25. The sensitivity (rate of change) of an option's theoretical value (assessed value) for a one dollar change in price of the underlying instrument. Expressed as a percentage - it represents an equivalent amount of underlying at a given moment in time.






26. The largest and oldest listed options exchange.






27. The instrument (stock - future - or cash index) to be delivered when an option is exercised.






28. The lowest price at which a dealer or trader is willing to sell a tradable instrument at a particular time.






29. 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)






30. 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.






31. The sensitivity of an option's delta at a given moment in time. It is the change in delta with respect to a 1-point change in the underlying. Examplee (let's say a call option with a 100 strike price has a 50 delta. If the underlying moves from 100 t






32. 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.






33. The date an option contract becomes void.






34. Charge levied for the privilege ofborrowing money






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






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






37. 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)






38. 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






39. 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.






40. 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.






41. 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.






42. 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]






43. 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.






44. 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)






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






46. An order to buy or sell a security that will remain in effect until the order is executed or canceled






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






48. 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






49. 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.






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