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






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






3. 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.






4. A market drop in the price of a security






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






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






7. 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






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






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






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






11. Fill-or-kill order






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






13. 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.






14. 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.






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






16. 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.






17. A contract between a buyer and seller whereby the buyer acquires the right - but not the obligation - to buy a specified underlying instrument at a fixed price on or before a specified date.






18. 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.






19. 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.






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






21. A long call position and a short put position.






22. 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






23. 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.






24. 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






25. A contract between a buyer and seller whereby the buyer acquires the right - but not the obligation - to buy a specified underlying instrument at a fixed price on or before a specified date.






26. An option that has no intrinsic value.






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






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






29. 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.






30. 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).






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






32. A short call position and a long put position.






33. 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






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






35. 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






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






37. 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.






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






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






40. 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)






41. 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.






42. An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly.






43. 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.






44. An option that has intrinsic value






45. 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)






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






47. 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.






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






49. 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.






50. A delta-neutral spread composed of more long options than short options on the same underlying instrument. This position generally profits from a large movement in either direction in the underlying instrument.