CPT Options & Derivatives Trading 2

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?

Accepted Answer

The full premium received

Answer

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?

Accepted Answer

Short strangle

Answer

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?

Accepted Answer

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

Answer

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?

Accepted Answer

$80,000

Answer

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:

Accepted Answer

Approach zero

Answer

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

(CPT) Certified Pro Trader Practice Test