Options & Derivatives Trading Flashcards

A trader constructs a bull call spread by buying a $45 call and selling a $55 call, both for the same expiration. What is the maximum loss?

Answer: The net premium paid

The maximum loss on a bull call spread is the net premium paid to enter the position.

Which Greek measures the sensitivity of an option's price to a 1% change in implied volatility?

Answer: Vega

Vega measures how much an option's price changes for a 1-percentage-point change in implied volatility.

An interest rate swap where one party pays a fixed rate and receives a floating rate is called a:

Answer: Plain vanilla swap

A plain vanilla interest rate swap involves exchanging fixed-rate payments for floating-rate payments (typically SOFR or LIBOR).

A put option has a delta of -0.40. If the underlying stock rises by $2, the option price will approximately:

Answer: Decrease by $0.80

Delta of -0.40 means for every $1 rise in the stock, the put loses $0.40, so a $2 rise causes an $0.80 decrease.

Which options strategy involves buying a call and a put with the same strike price and expiration?

Answer: Straddle

A long straddle involves purchasing both a call and a put at the same strike price and expiration to profit from large moves in either direction.

In the context of futures trading, 'backwardation' refers to a market condition where:

Answer: Futures prices are lower than the spot price

Backwardation occurs when futures prices are below the current spot price, often signaling supply shortages or high near-term demand.

What is the effect of rising interest rates on the price of a call option, according to the Rho Greek?

Answer: Call option prices increase

Rho is positive for call options, meaning rising interest rates increase call option prices because the cost of carry on the underlying increases.