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Options Trading

Instructions:
  • Answer 50 questions in 15 minutes.
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  • Match each statement with the correct term.
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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 list of the options available for the underlying stock symbols in which you are interested.






2. An option that has intrinsic value






3. 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.






4. The sensitivity (rate of change) of an option's theoretical value (assessed value) for a one dollar change in price of the underlying instrument. Expressed as a percentage - it represents an equivalent amount of underlying at a given moment in time.






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






6. 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.






7. 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)






8. 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.






9. 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)






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






11. Same as ask price






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






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






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






15. 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.






16. The date an option contract becomes void.






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






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






19. An option that has intrinsic value






20. 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






21. 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.






22. 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.






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






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






25. 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.






26. An option whose underlying asset is an index.






27. 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






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






29. 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)






30. 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.






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






32. 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.






33. 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.






34. 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)






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






36. An option on shares of an individual common stock.






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






38. 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.






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






40. 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






41. An option that has no intrinsic value.






42. 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)






43. 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.






44. Amount by which an option is ITM.






45. 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.






46. An option strategy with limited risk and limited profit potential that involves both a long(or short) straddle - and a short (or long) strangle. (short strangle: buying 1 ABC May 90 call and 1 ABC May 90 put - and writing 1 ABC May 95 call and writin






47. Another name for calendar spread.






48. A market drop in the price of a security






49. Opening sale of a security.






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







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