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 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






2. 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






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






4. 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






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






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






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






8. 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.






9. 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.






10. 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.






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






12. An option whose underlying asset is an index.






13. 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.






14. Commodity trading advisor.






15. An option strategy that is neither bullish nor bearish.






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






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






18. 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






19. 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






20. 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.






21. 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.






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






23. Designated primary market maker.






24. The date an option contract becomes void.






25. 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.






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






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






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






29. 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.






30. 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






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






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






33. 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.






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






35. 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






36. 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.






37. 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






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






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






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






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






42. 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.






43. 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)






44. 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.






45. 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)






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






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






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






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






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