CPT Options & Derivatives Trading 3 — Questions and Answers
Question 1: 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?
- The width of the spread ($10)
- The net premium paid (Correct answer)
- Unlimited
- Zero
Correct answer: The net premium paid
The maximum loss on a bull call spread is the net premium paid to enter the position.
Question 2: Which Greek measures the sensitivity of an option's price to a 1% change in implied volatility?
- Delta
- Gamma
- Vega (Correct answer)
- Theta
Correct answer: Vega
Vega measures how much an option's price changes for a 1-percentage-point change in implied volatility.
Question 3: An interest rate swap where one party pays a fixed rate and receives a floating rate is called a:
- Basis swap
- Plain vanilla swap (Correct answer)
- Currency swap
- Total return swap
Correct answer: Plain vanilla swap
A plain vanilla interest rate swap involves exchanging fixed-rate payments for floating-rate payments (typically SOFR or LIBOR).
Question 4: A put option has a delta of -0.40. If the underlying stock rises by $2, the option price will approximately:
- Increase by $0.80
- Decrease by $0.80 (Correct answer)
- Increase by $0.40
- Decrease by $0.40
Correct 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.
Question 5: Which options strategy involves buying a call and a put with the same strike price and expiration?
- Strangle
- Straddle (Correct answer)
- Butterfly spread
- Iron condor
Correct 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.
Question 6: In the context of futures trading, 'backwardation' refers to a market condition where:
- Futures prices are higher than the spot price
- Futures prices are lower than the spot price (Correct answer)
- Spot and futures prices are equal
- Futures prices are declining each day
Correct 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.
Question 7: What is the effect of rising interest rates on the price of a call option, according to the Rho Greek?
- Call option prices decrease
- Call option prices increase (Correct answer)
- Call option prices are unaffected
- Call options lose all time value
Correct 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.
CPT Options & Derivatives Trading 3
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?