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






2. A four-sided option spread that involves a long call and a short put at one strike price as well as a short call and a long put at another strike price. (buying 1 LMN Jan 50 call - and writing 1 LMN Jan 55 call; simultaneously buying 1 LMN Jan 55 put






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






4. The process by which the seller of an option is notified of the buyer's intention to exercise that option.






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






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






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






8. At the money






9. 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)






10. 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.






11. A position established with the specific intent of protecting an existing position. (an owner of common stock may buy a put option to hedge against a possible stock price decline).






12. 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






13. A means of increasing return or worth without increasing investment.






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






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






16. 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)






17. 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






18. 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.






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. The cycle of expiration dates used in short-term options trading. there are three cycles: (January - April - July - October; February - May - August - November; or March - June - September - December) Because options are traded in contracts for three






21. An option that has intrinsic value






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






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






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






25. Opening sale of a security.






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






27. 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






28. 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)






29. The month during which the expiration date occurs






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






31. The simultaneous purchase and sale of options of the same class (call or put - having same underlying) at the same strike prices - but with different expiration dates - selling the short-term option and buying the long-term option.






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






33. Designated primary market maker.






34. 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.






35. An option whose exercise price is equal to the current market price of the underlying security. An ATM option may or may not have intrinsic value.






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






37. 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.






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






39. 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






40. 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






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






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. Calculations performed on updated prices.






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






45. 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






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






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






48. 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)






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






50. 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