Options & Derivatives Trading Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Options & Derivatives Trading flashcards as text
A calendar spread (time spread) involves:
Answer: Buying and selling options at the same strike price with different expirations
A calendar spread uses the same strike price but different expiration dates, exploiting differences in time decay rates between near and far-dated options.
What does 'open interest' represent in the derivatives market?
Answer: The total number of outstanding contracts that have not been settled or closed
Open interest is the total number of active contracts in the market that remain open, meaning they have not been closed, expired, or delivered.
A trader buys a put option on a stock they do not own. This strategy is best described as:
Answer: A long put speculative position
Buying a put without owning the underlying stock is a speculative long put position, used to profit from an anticipated price decline.
Which futures market concept refers to the convergence of futures prices toward the spot price as expiration approaches?
Answer: Basis convergence
Basis convergence describes the narrowing of the gap between the futures price and spot price as the contract nears expiration, eventually equalizing at settlement.
A long butterfly spread using calls reaches maximum profit when the stock price at expiration is:
Answer: At the middle (body) strike price
The long butterfly earns maximum profit when the stock expires exactly at the middle strike, where the short options expire worthless and the long options have maximum value.
What is 'delta hedging' and what is its primary goal?
Answer: Continuously adjusting the underlying position to maintain a delta-neutral portfolio
Delta hedging involves dynamically trading the underlying asset to offset changes in an option's delta, keeping the total portfolio delta near zero.
Under put-call parity, if a call option is overpriced relative to a put with the same strike and expiration, an arbitrageur would:
Answer: Sell the call, buy the put, buy the stock, and borrow the present value of the strike
To exploit an overpriced call, an arbitrageur sells the expensive call, buys the put, buys the stock, and borrows the PV of the strike to lock in a riskless profit.