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 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






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






3. The sensitivity of an options theoretical value to a change in implied volatility.






4. 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).






5. 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.






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






7. 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






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






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






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






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






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






14. 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






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






16. 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.






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






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






19. 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.






20. Third Friday of expiration month






21. 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).






22. Charge levied for the privilege ofborrowing money






23. 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






24. 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).






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






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






27. 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.






28. 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.






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






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






31. A spread in which the difference in the long and short options premiums results in a net debit.






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






33. 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)






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






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






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






37. 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






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






39. Opening sale of a security.






40. 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.






41. Interest rate at which brokerage firms borrow from banks to finance their clients' security positions. The call loan rate is sometimes used because the loans can be called on a 24-hour notice.






42. A spread in which the difference in the long and short options premiums results in a net debit.






43. The date on which an option and the right to exercise it cease to exist. Listed stock options expire the Saturday following the third Friday of every month.






44. Commodity trading advisor.






45. Designated primary market maker.






46. 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)






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






48. 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






49. 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.






50. 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.