CDP CDP Trading Strategies & Execution 1 — Questions and Answers
Question 1: What is a 'long straddle' options strategy?
- Buying both a call and put at the same strike price and expiration (Correct answer)
- Selling both a call and put at the same strike price
- Buying a call at a higher strike and put at a lower strike
- Selling a call and buying a put at different strikes
Correct answer: Buying both a call and put at the same strike price and expiration
A long straddle involves buying both a call and a put with the same strike price and expiration, profiting from large price moves in either direction.
Question 2: What is the primary purpose of a 'collar' options strategy?
- To maximize upside gains
- To protect a long stock position against downside while capping upside (Correct answer)
- To speculate on volatility
- To generate unlimited income from premiums
Correct answer: To protect a long stock position against downside while capping upside
A collar protects a long stock position by buying a put for downside protection and selling a call that caps upside gains simultaneously.
Question 3: In futures trading, what does 'rolling over' a contract mean?
- Closing a futures position at a loss
- Closing a near-term contract and opening a longer-dated one to maintain exposure (Correct answer)
- Converting a futures contract to a spot position
- Adding margin to an existing position
Correct answer: Closing a near-term contract and opening a longer-dated one to maintain exposure
Rolling over means closing the expiring futures contract and simultaneously opening a new position in a later-dated contract to maintain market exposure.
Question 4: What is a 'bull call spread'?
- Buying a call at a lower strike and selling a call at a higher strike (Correct answer)
- Buying calls at two different expiration dates
- Selling a call and buying a put at the same strike
- Buying a call and selling a put at different strikes
Correct answer: Buying a call at a lower strike and selling a call at a higher strike
A bull call spread involves buying a call at a lower strike price and selling a call at a higher strike, limiting both potential profit and loss.
Question 5: What is 'basis risk' in futures hedging?
- The risk that futures prices move in the opposite direction to spot prices
- The risk that the difference between the spot price and futures price changes unexpectedly, reducing hedge effectiveness (Correct answer)
- The risk of margin calls exceeding available capital
- The risk that a counterparty defaults on a futures contract
Correct answer: The risk that the difference between the spot price and futures price changes unexpectedly, reducing hedge effectiveness
Basis risk is the risk that the basis (difference between spot and futures price) changes unexpectedly, undermining the effectiveness of a futures hedge.
Question 6: Which order type guarantees execution but not price in derivatives trading?
- Limit order
- Stop-limit order
- Market order (Correct answer)
- Good-till-canceled order
Correct answer: Market order
A market order guarantees immediate execution at the best available price but does not guarantee the execution price, especially in volatile markets.
CDP CDP Trading Strategies & Execution 1
What is a 'long straddle' options strategy?