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Options Trading

Instructions:
  • Answer 50 questions in 15 minutes.
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  • 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 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.






2. In a customer transaction - edge refers to the markup or markdown price that a market maker generates in the deal. It can be thought of as a tax charged by the market maker for services rendered.






3. 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)






4. The seller of an option contract Who is obligated to meet the terms of delivery if the option is exercised.






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






6. Designated primary market maker.






7. 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






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






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






10. 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.






11. Opening sale of a security.






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






13. An option that has intrinsic value






14. 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)






15. Opening sale of a security.






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






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






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






19. 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.






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






21. 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.






22. 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






23. 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.






24. An order that is designated to be executed on or before the expiration date. (all or none)






25. 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).






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






27. 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)






28. 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.






29. 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.






30. The combination of a vertical and a calendar spread - wherein the investor buys and sells options of the same class at different expiration dates and different strike prices.






31. 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






32. 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.






33. 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






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






35. 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






36. Same as ask price






37. A facility that compares and reconciles both sides of a trade in addition to receiving and delivering payments and securities.






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






39. The largest and oldest listed options exchange.






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






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






42. 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.






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






44. The ratio of trading volume in put options to the trading volume in call options. The ratio provides a quantitative measure of the bullishness or bearishness of investors.






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






46. 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.






47. 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






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






49. 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)






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







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