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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. 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.






2. 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.






3. 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.






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






5. Same as ask price






6. Amount by which an option is ITM.






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






8. An option position that involves the purchase/sale of a call and the sale (purchase of a put on the same underlying strike with the same expiration. Can also be referred to as any set of multiple purchases and sales of options.






9. 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).






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






11. 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)






12. 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.






13. 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






14. A graphical representation of the estimated theoretical value of an option at one point in time - at various prices of the underlying stock.






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






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






17. 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.






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






19. A long stock position and a long put position.






20. A person who believes that a security - or the market in general - will rise in price; a positive or optimistic outlook.






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






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






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






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






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






26. 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






27. 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)






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






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






30. The price that an owner of an option can purchase (call) or sell (put) the underlying stock.






31. 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.






32. An option whose exercise price is equal to the current market price of the underlying security. An ATM option may or may not have intrinsic value.






33. An option position that involves the purchase/sale of a call and the sale (purchase of a put on the same underlying strike with the same expiration. Can also be referred to as any set of multiple purchases and sales of options.






34. Third Friday of expiration month






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






36. 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)






37. The largest and oldest listed options exchange.






38. 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.






39. Designated primary market maker.






40. 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.






41. 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






42. 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






43. An order to buy or sell at the last price on the close.






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






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






46. 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.






47. 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






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






49. The total number of outstanding option contracts in a given series






50. The total price of an option: intrinsic value plus extrinsic value







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