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. Commodity trading advisor.






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






3. 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






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






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






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






7. 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






8. 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






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






10. 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






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






12. 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.






13. 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.






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






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






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






17. 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






18. 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.






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






20. 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






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






22. Amount by which an option is ITM.






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






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






25. 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.






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






27. Same as ask price






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






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






30. 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)






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






32. Good Til Cancel






33. Designated primary market maker.






34. An agent who facilitates trades between a buyer and a seller and receives a commission for services.






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






36. 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.






37. 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.






38. 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)






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






40. The degree to which the price of an underlying tends to fluctuate over time. This variable - which the market implies to the underlying - may result from pricing an option through a model.






41. 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






42. 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.






43. 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)






44. A list of the options available for the underlying stock symbols in which you are interested.






45. 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.






46. 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.






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






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






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. 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)