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






2. 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]






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






4. Term used to describe the ownership of a security - contract - or commodity that grants the owner the right to transfer ownership by sale or gift.






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






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






7. 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.






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






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






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






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






13. 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.






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






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






16. A debit spread in which a decline in the price of the underlying security will theoretically increase the value of the spread. (writing 1 XYZ Jan 50 put and buying 1 XYZ Jan 55 put)






17. 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.






18. 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






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. Charge levied for the privilege ofborrowing money






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






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






23. 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.






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






25. 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)






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






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






28. 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)






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






30. 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.






31. 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.






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






33. 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.






34. 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.






35. Calculations performed on updated prices.






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






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






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






39. 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






40. 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.






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






42. 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.






43. The sensitivity of theoretical option prices with regard to small changes in time. Theta measures the rate of decay in the time value of options.






44. Another name for calendar spread.






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






46. 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.






47. A strategy involving two or more options of the same type (or options combined with an underlying stock position) that will profit from a rise in the price of the underlying stock. Consists or selling an option with a higher strike - and buying an op






48. 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






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






50. Same as ask price