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






2. Designated primary market maker.






3. 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






4. The purchase or sale of an equal number of puts or calls with the same underlying - stike price - and expiration.






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






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






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






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






9. 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.






10. Third Friday of expiration month






11. 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.






12. Commodity trading advisor.






13. 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.






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






15. 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.






16. The estimated value of an option derived from a mathematical model.






17. 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.






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






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






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






21. Good Til Cancel






22. A market drop in the price of a security






23. The sensitivity of theoretical option prices with regard to small changes in interest rates. Increases in interest rates lead to higher call values and lower put values. Lower interest rates do the opposite.






24. The use of money to create more money through an appreciating or income-producing asset.






25. 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






26. 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.






27. 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)






28. Good Til Cancel






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






30. The largest and oldest listed options exchange.






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






32. 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.






33. 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.






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






35. An option that has no intrinsic value.






36. 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.






37. 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.






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






39. 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.






40. 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.






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






42. Third Friday of expiration month






43. Same as ask price






44. These options can be exercised on any business dy prior to expiration and the settlement value will be based on the index close that day - settled in the cash equivalent of the amount in-the-money.






45. 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).






46. 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






47. A position that will perform best if there is little or no net change in the price of the underlying stock.






48. 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)






49. 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.






50. 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.