CPT Options & Derivatives Trading 2 — Questions and Answers
Question 1: 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?
- The full premium received (Correct answer)
- $5 per share
- Unlimited
- $50 per share
Correct answer: The full premium received
When selling a put, the maximum profit is always capped at the premium received upfront.
Question 2: Which options strategy is best suited for a trader who expects low volatility and a sideways-moving stock?
- Long straddle
- Short strangle (Correct answer)
- Long call
- Bull call spread
Correct answer: Short strangle
A short strangle profits when the underlying stays within a range, benefiting from low volatility and time decay.
Question 3: What does a negative gamma position indicate for an options trader?
- The position profits from large moves in either direction
- Delta becomes more negative as price rises
- The position loses money as the underlying moves sharply in any direction (Correct answer)
- Time decay accelerates profits
Correct 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.
Question 4: 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?
- $800
- $8,000
- $80,000 (Correct answer)
- $800,000
Correct answer: $80,000
Notional value equals price per unit multiplied by contract size: $80 × 1,000 = $80,000.
Question 5: An investor holds a long call option that is deep in-the-money. As expiration approaches, the option's time value will:
- Increase rapidly
- Remain constant
- Approach zero (Correct answer)
- Equal intrinsic value
Correct answer: Approach zero
Time value (extrinsic value) decays to zero at expiration regardless of how deep in-the-money an option is.
Question 6: Which of the following best describes a 'covered call' strategy?
- Buying a call option while owning the underlying stock
- Selling a call option while owning the underlying stock (Correct answer)
- Buying a call option while short the underlying stock
- Selling a call option while short the underlying stock
Correct 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.
Question 7: What is the primary difference between American-style and European-style options?
- American options can only be traded on US exchanges
- American options can be exercised at any time before expiration (Correct answer)
- European options have higher premiums
- American options have no intrinsic value
Correct 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.
CPT Options & Derivatives Trading 2
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?