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. An option whose underlying asset is an index.






2. 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.






3. 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.






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






5. At the money






6. 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)






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






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






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






10. Good Til Cancel






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






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






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






14. Calculations performed on updated prices.






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






16. 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.






17. 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.






18. Same as ask price






19. 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.






20. The time of day by which all exercise notices must be received on the expiration date.






21. The date an option contract becomes void.






22. 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).






23. 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.






24. 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.






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






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






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






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






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






30. Long-term equity anticipation securities are calls and puts with expiration's as long as two to three years.






31. An option whose underlying asset is an index.






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






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






34. A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or long call position. A short put is naked if the writer is not short sto






35. 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.






36. 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.






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






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






39. The price that an owner of an option can purchase (call) or sell (put) the underlying stock.






40. 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.






41. Amount by which an option is ITM.






42. 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






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






44. 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.






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






46. Third Friday of expiration month






47. 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)






48. 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.






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






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