Trading Strategies & Market Timing 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 Trading Strategies & Market Timing flashcards as text
Which trading strategy specifically profits from the difference in implied volatility between short-dated and long-dated options on the same underlying?
Answer: Calendar (time) spread
A calendar spread (horizontal spread) profits from the differential decay rates and volatility differences between near-term and longer-dated options.
In technical analysis, a 'volume climax' at the end of a prolonged downtrend is significant because it may signal:
Answer: Exhaustion of selling pressure and a potential bottom reversal
A volume climax — a spike in volume far above average at the end of a downtrend — often represents a final panic sell-off (capitulation), exhausting sellers and potentially marking a bottom.
A futures trader holding a long crude oil contract notices the market is in 'contango.' This means:
Answer: Futures prices for later delivery months are higher than the current spot price
Contango describes a market structure where futures contracts for later delivery trade at a premium to the current spot price, typically reflecting storage and carry costs.
Which of the following best describes the 'Dogs of the Dow' investment strategy?
Answer: Buying the 10 highest-dividend-yielding Dow stocks at the start of each year
The Dogs of the Dow strategy involves buying the 10 Dow Jones Industrial Average stocks with the highest dividend yields at the start of each year and holding them for 12 months.
A trader sees that the S&P 500 has broken below its 200-day moving average on heavy volume after a prolonged uptrend. According to trend-following principles, this signal suggests:
Answer: A potential shift from a bullish to a bearish long-term trend warranting reduced long exposure
A break below the 200-day moving average on heavy volume is widely interpreted as a bearish long-term signal, suggesting trend followers should reduce long exposure.
In algorithmic trading, 'latency arbitrage' refers to exploiting:
Answer: The speed advantage of receiving and acting on market data faster than other participants
Latency arbitrage involves high-frequency traders using faster data connections to act on price information before slower market participants, capturing short-lived pricing discrepancies.
A trader applies the 'Elder Ray Index,' which measures the power of bulls and bears relative to an exponential moving average. A 'bull power' reading below zero indicates:
Answer: The current price bar's high is below the exponential moving average, signaling weakness
Bull Power is calculated as the bar's high minus the EMA; a negative reading means even the high of the period could not reach the moving average, reflecting bearish dominance.