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1.0 Beginner: The Basics of Options

 

  1. What is an option?
  1. A financial tool called a derivative
  2. A financial tool to trade future contracts
  3. A financial tool to trade foreign exchange 
  4. A financial tool called a LEAP

 

Answer: A

 

Notes:

  • Options are financial tools that are called derivatives.
  • Derivatives are based on the value of underlying securities, such as stocks.  

 

  1. What is an option contract?
  1. Gives an investor the right, but not the obligation, to buy or sell a stock at an agreed upon price.
  2. Gives an investor the obligation to buy or sell a stock at an agreed upon price.
  3. Gives an investor the right, but not the obligation, to buy or sell a stock at any price.
  4. Gives an investor the obligation to buy or sell a stock at any price.  

 

Answer: A

 

Notes: A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed upon price.

 

  1. What is a call option?
  1. Call options offer the writer  the opportunity to buy the underlying asset at the strike price.
  2. Call options offer the writer  the opportunity to sell the underlying asset at the current market price.
  3. Call options offer the buyer the opportunity to buy the underlying asset at the strike price.
  4. Call options offers the buyer the opportunity to sell the underlying asset at the current market price.

 

Answer : C

 

  1. What is a put option?
  1. Put options offer the writer the opportunity to sell the underlying asset at the strike price.
  2. Put options offer the buyer the opportunity to sell the underlying asset at the strike price.  
  3. Put options offer the buyer the opportunity to buy the underlying asset at the current market price..
  4. Put options offer the writer the opportunity to buy the underlying asset at the current market price.

 

Answer: B

 

  1. What are weekly contracts?
  1. Options contracts that expire on every second Friday of the month.
  2. Options contracts that expire on every third Thursday of the month.
  3. Options contracts that expire on Friday of every week.
  4. Options contracts that expire on Saturday of every week.

 

Answer : C

 

  1. What are standard monthly contracts?
  1. Options contracts that are issued with 9 month expirations and expire on the Saturday following the 3rd Friday of every month at 11:59pm EST.
  2. Options contracts that are issued with 12 month expirations and expire on the Sunday following the 2nd Friday of every month at 11:50pm EST.
  3. Options contracts that are issued with 6 month expirations and expire on the Friday following the 2nd Friday of every month at 11:59 EST.
  4. Options contracts that are issued with 9 months of expiration and expire on the Saturday of the 2nd Friday of every month at 11:59pm EST.


Answer: A

 

  1. What does the OCC stand for?
  1. Options Clearing Company
  2. Options Clearing Committee
  3. Options Conference Committee
  4. Options Concile Company

 

Answer : B

 

  1. What are Listed Stock Options?
  1. Listed Options are futures options that are a put or call that is traded on a national options exchange, and have a fixed strike price and a fixed expiration date.
  2. Listed Options are a put or call that is traded on a national options exchange, and have variable strike prices and fixed expiration dates
  3. Listed Options are a put or call that is traded on a regional options exchange only, and have variable strike prices and variable expiration dates.
  4. Listen Options are a put or call that is traded on a national options exchange, and have a fixed strike price and a fixed expiration date.

 

Answer : D

 

  1. What is the underlying security for stock options?
  1. The stock that can be purchased or sold upon exercise of options contracts
  2. The future that can be purchased or sold upon exercise of options contracts
  3. The stock that can be purchased or sold without exercise of options contracts
  4. The future that can be purchased or sold without exercise of options contracts

 

Answer : A

 

  1. What does it mean to exercise an option?
  1. To implement the right for the option holder to buy (for a call) or sell (for a put) the underlying security at the market price.
  2. To implement the right for the option holder to sell (for a call) or buy (for a put) the underlying security at the listed strike price.
  3. To implement the right for the option seller to sell (for a call) or buy (for a put) the underlying security at the listed strike price.
  4. To implement the right for the option holder to buy (for a call) or sell (for a put) the underlying security at the listed strike price.

 

Answer : D

 

Notes:

  • Options are typically exercised when they are in the money.

 

  1. When do listed equity options settle?
  1. Settle “non-regular way”, or two business days from the expiration date
  2. Settle “regular way”, or four business days from the expiration date
  3. Settle “regular way”, or three business days from the expiration date
  4. Settle “non-regular way”, or four business days from the expiration date

 

Answer : C

 

  1. What is the strike price of an option?
  1. The price at which the holder of an option can buy (for a call) or sell (for a put) the underlying security when the option is exercised.
  2. The price at which the seller of an option can sell (for a call) or buy (for a put) the underlying security when the option is exercised.
  3. The price at which the holder of an option can buy (for a call) or sell (for a put) the underlying security before the option is exercised.
  4. The price at which the seller of an option can buy (for a call) or sell (for a put) the underlying security before the option is exercised.

 

Answer : A

 

  1. How is options premium calculated?
  1. Option Premium = Intrinsic Value + Extrinsic Value
  2. Option Premium = Intrinsic Value – Extrinsic Value
  3. Option Premium = Intrinsic Value + Extrinsic Value + Strike Price
  4. Option Premium = Intrinsic Value – Extrinsic Value + Strike Price

 

Answer : A

 

  1. How is Intrinsic Value calculated?
  1. Difference between the strike price and market price of the underlying security.  
  2. Difference between the market price and the current option price 
  3. Difference between the current option price and At-the-Money (ATM) option price
  4. Difference between the At-The-Money (ATM) option price and the market price of the underlying security

 

Answer: A

 

Notes:  Intrinsic Value = Strike Price – Market Price of security

 

  1. How is Extrinsic Value calculated?
  1. The sum of the strike price of an option and the intrinsic price minus the market price, also known as its premium.
  2. The difference between the market price of an option, also known as its premium, and its intrinsic price.
  3. The difference between the market price of an option, also known as its premium, and its strike price.  
  4. The difference between the strike price of an option and the intrinsic price plus premium

 

Answer: B

 

Notes:

  • Extrinsic Value = premium – intrinsic price
  • Extrinsic Value is also known as time value

 

  1. What are the types of options?
  1. Calls and Puts
  2. Strikes and Market price
  3. Calls only
  4. Puts only

 

Answer : A

 

  1. What is an options class?
  1. Every Call or every Put of an underlying stock, regardless of expiration month and strike price.
  2. Every Call or every Put of an underlying stock, in the same expiration month and same strike price.
  3. Every Call of an underlying stock, regardless of expiration month and strike price.
  4. Every Put of an underlying stock, regardless of expiration month and strike price.

 

Answer : A

 

  1. What is an option expiration?
  1. The day after the final date on which the derivatives contract is valid
  2. The final date on which the derivatives contract is valid
  3. The day prior the final date on which the derivatives contract is valid
  4. Two days prior the final date on which the derivatives contract is valid

 

Answer : B

 

Notes:

  • All contracts have a specified life cycle and expire on a specific date. 

 

  1. What does Out of the Money (OTM) of a call refer to?
  1.  call is “Out-of-the-Money” (OTM) when the market price is higher than strike price.
  2. A call is “Out-of-the-Money” (OTM) when it has only intrinsic value and no extrinsic value.
  3. A call is “Out-of-the-Money” (OTM) when the market price is equal to the strike price.
  4. A call is “Out-of-the-Money” (OTM) when the market price is lower than strike price.

 

Answer : D

 

  1. What does Out-of-the-Money (OTM) of a put refer to?
  1. A put is “Out-of-the-Money” (OTM) when it has only intrinsic value and no extrinsic value.
  2. A put is “Out-of-the-Money” (OTM) when the market price is equal to the strike price.
  3. A put is “Out-of-the-Money” (OTM) when the market price is higher than the strike price.
  4. A put is “Out-of-the-Money” (OTM) when the market price is lower than the strike price.

 

Answer : C

 

  1. What does In The Money (ITM) of a call refer to?
  1. A call is “in the money” when the market price is lower than the strike price.
  2. A call is “in the money” when the market price is higher than the strike price.
  3. A call is “in the money” when the market price is equal to the strike price.
  4. A call is “in the money” when the option possesses extrinsic value and no intrinsic value.

Answer : B

 

Notes:

  • A call option is in the money (ITM) if the market price is above the strike price.
  • ITM options only possess intrinsic value, and no extrinsic value

 

  1. What does In The Money (ITM) of a put refer to?
  1. A put is “in the money” when the market price is lower than the strike price.
  2. A put is “in the money” when the market price is higher than the strike price.
  3. A put is “in the money” when the market price is equal to the strike price.
  4. A put is “in the money” when the option possesses extrinsic value and no intrinsic value.

 

Answer : A

 

Notes:  

  • A put option is in the money if the market price is below the strike price.
  • ITM options only possess intrinsic value, and no extrinsic value

 

  1. What does At The Money (ATM) refer to?
  1. When an option’s strike price is less than the market price of the underlying security.
  2. When an option’s strike price is greater than the market price of the underlying security.
  3. When an option’s strike price is equal to the market price of the underlying security.
  4. When the market price of the underlying security is equal to the option’s strike price plus breakeven price

 

Answer : C

 

  1. How do you calculate the breakeven price of a long call?
  1. Breakeven = Strike Price + Market Price
  2. Breakeven = Cost – Strike Price
  3. Breakeven = Cost + Strike Price
  4. Breakeven = Strike Price – Market Price

 

Answer : C

 

  1. How do you calculate the breakeven price of a long put?
  1. Breakeven = Strike Price + Market Price
  2. Breakeven = Cost – Strike Price
  3. Breakeven = Cost + Strike Price
  4. Breakeven = Strike Price – Market Price

 

Answer : B

 

  1. How do you calculate the breakeven price of a covered call?
  1. Breakeven = call option premium – market price of stock at initiation
  2. Breakeven = call option premium + market price of stock at initiation
  3. Breakeven = call option premium – current market price
  4. Breakeven = call option premium – strike price

 

Answer : A

 

  1. How do you calculate the breakeven price of a protective put?
  1. Breakeven = current price of stock – premium paid
  2. Breakeven = purchase price of stock – premium paid
  3. Breakeven = current price of stock + premium paid
  4. Breakeven = purchase price of stock + premium paid

 

Answer : D 

 

  1. What are the 4 factors that impact options premium?
  1. implied volatility, intrinsic value, time remaining until expiration
  2. historical volatility, intrinsic value, time remaining until expiration
  3. implied volatility, intrinsic value, time remaining until expiration, interest rates
  4. historical volatility, extrinsic value, time remaining until expiration, interest rates

 

Answer : C

 

  1. What is Implied Volatility?
  1. IV is a metric that captures the market’s view of the likelihood of changes in a given security’s price
  2. IV is a metric that captures the market’s view of the likelihood of a change in a given security’s delta
  3. IV is a metric that captures the market’s view of the likelihood of a change in a given security’s time value
  4. IV is a metric that captures the market’s view of the likelihood of a change in a given security’s historical volatility

 

Answer : A

 

  1. What are the 5 common options greeks?
  1. Delta, Gamma, Theta, Vega, Rho
  2. Vomma, Volta, Surge, Speed, Delta
  3. Delta, Theta, Rho, Volga, Vomma
  4. Gamma, Delta, Vola, Volga, Theta

 

Answer : A

 

Notes: Option greeks us a term used to describe the different dimensions of risk involved in taking an options position

 

  1. What does the greek, Delta, represent?

 

  1. Represents the rate of change between the options price and $4 change in the underlying asset’s price.
  2. Represents the rate of change between the theta and $3 change in the underlying asset’s price.
  3. Represents the rate of change between the gamma and $2 change in the underlying asset’s price.
  4. Represents the rate of change between the options price and $1 change in the underlying asset’s price.

 

Answer : D

 

Notes: Calls have a positive delta, between 0 and 1.  Puts have a negative delta, between 0 and -1

 

  1. What does the greek, Gamma, represent?
  1. Represents the rate of change between the options theta and the underlying asset price.
  2. Represents the rate of change between the options delta and the underlying asset price
  3. Represents the rate of change between the options vega and the underlying asset price.
  4. Represents the rate of change between the options rho and the underlying asset price.

 

Answer : B

 

Notes:

  • Second order derivative
  • Indicates the amount the delta would change given a $1 move in underlying asset’s price

 

  1. What does the greek, Theta, represent?
  1. Represents the rate of change between the options price and historical volatility, or options volatility sensitivity
  2. Represents the rate of change between the options implied volatility and time, or options vomma sensitivity
  3. Represents the rate of change between the options price and time, or options time sensitivity
  4. Represents the rate of change between the options price and delta, or options dollar sensitivity

 

Answer : C

 

Notes:

  • Also known as option’s time decay
  • Theta increases when options are At the money
  • Theta decreases when options are In the money or Out-of-the-money
  • As options near expiration, Theta will increase significantly

 

  1. What does the greek, Vega, represent?
  1. Represents the rate of change between the underlying market price and implied volatility.
  2. Represents the rate of change between an option’s value and the underlying assets implied volatility.
  3. Represents the rate of change between the option’s delta and the underlying assets implied volatility.
  4. Represents the rate of change between the option’s time value theta and the underlying assets implied volatility.

 

Answer : B

 

Notes:

  • Known as the option’s sensitivity to volatility
  • Vega indicates the amount the options price will change given a 1% change in implied volatility

 

  1. What does the greek, Rho, represent?
  1. Represents the rate of change between an option’s value and a 2% change in market price.
  2. Represents the rate of change between an option’s value and a 3% change in delta.
  3. Represents the rate of change between an option’s value and a 4% change in volatility.
  4. Represents the rate of change between an option’s value and a 1% change in interest rates.

 

Answer : D

 

Notes:

  • This measures the sensitivity to interest rates.

 

  1. When are Weekly options contracts issued?
  1. Issued Wednesday and expire the following Thursday
  2. Issued Tuesday and expire the following Wednesday
  3. Issued Friday and expire the following Thursday
  4. Issued Thursday and expire the following Friday

 

Answer : D

 

Author:
Options Academy

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