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. Calculations performed on updated prices.






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






3. 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.






4. 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.






5. Commodity trading advisor.






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






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. A market drop in the price of a security






9. Third Friday of expiration month






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






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






12. 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.






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






14. 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.






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






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






17. 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






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






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






20. 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






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






22. 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






23. 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






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






25. 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.






26. 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.






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






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






29. An option strategy that generally involves the purchase of a farther-term option (call or put) and the selling (writing) of an equal number of nearer-term options of the same type and strike price. (buying 1ITI May 60 cal[ far term portion of spread]






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






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






33. A credit spread in which a rise in price of the underlying security will theoretically increase the profit value of the spread. (writing 1 XYZ Jan 55 put and buying 1 XYZ Jan 50 put)






34. A strategy involving four options and four strike prices - and that has both limited risk and limited profit potential. A long call condor spread is establish by buying one call the lowest strike - writing one call at the second strike - writing anot






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






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






37. Same as ask price






38. 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.






39. Received notification of an assignment by rhw options clearing corporation.






40. 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.






41. Opening sale of a security.






42. 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.






43. 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)






44. 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






45. A term referring to all options of the same type- either calls or puts- having the same underlying instrument.






46. An option that has intrinsic value






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






48. 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






49. 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)






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