Options & Derivatives Trading Flashcards

A trader sells a put option with a strike price of $50 when the stock is trading at $55. What is the maximum profit the trader can earn?

Answer: The full premium received

When selling a put, the maximum profit is always capped at the premium received upfront.

Which options strategy is best suited for a trader who expects low volatility and a sideways-moving stock?

Answer: Short strangle

A short strangle profits when the underlying stays within a range, benefiting from low volatility and time decay.

What does a negative gamma position indicate for an options trader?

Answer: The position loses money as the underlying moves sharply in any direction

Negative gamma means the trader's delta moves against them as price moves, causing losses from large directional moves.

A futures contract for crude oil is priced at $80/barrel with a contract size of 1,000 barrels. What is the notional value of one contract?

Answer: $80,000

Notional value equals price per unit multiplied by contract size: $80 × 1,000 = $80,000.

An investor holds a long call option that is deep in-the-money. As expiration approaches, the option's time value will:

Answer: Approach zero

Time value (extrinsic value) decays to zero at expiration regardless of how deep in-the-money an option is.

Which of the following best describes a 'covered call' strategy?

Answer: Selling a call option while owning the underlying stock

A covered call involves selling a call option against an existing long stock position to generate income.

What is the primary difference between American-style and European-style options?

Answer: American options can be exercised at any time before expiration

American-style options allow the holder to exercise at any point up to and including expiration, unlike European options which only allow exercise at expiration.