Day Trading Advanced Topics 2 — Questions and Answers
Question 1: What is the primary purpose of using a Volume Weighted Average Price (VWAP) in day trading?
- To predict next-day opening prices
- To benchmark execution quality against the average price weighted by volume (Correct answer)
- To calculate the daily price range
- To determine after-hours trading levels
Correct answer: To benchmark execution quality against the average price weighted by volume
VWAP represents the average price weighted by volume and is used by traders and institutions to benchmark whether they bought or sold at a favorable price relative to the day's activity.
Question 2: In options day trading, what does a high implied volatility (IV) rank indicate about an option's premium?
- Premiums are cheap relative to historical norms
- Premiums are expensive relative to historical norms (Correct answer)
- The underlying stock will move up
- The option has low gamma risk
Correct answer: Premiums are expensive relative to historical norms
A high IV rank means current implied volatility is elevated compared to its historical range, making options premiums expensive and often favoring selling strategies.
Question 3: What is a 'dark pool' and how can it affect day trading decisions?
- A private exchange for large institutional trades that can signal hidden supply/demand (Correct answer)
- A broker's internal margin account for risky trades
- An after-hours trading session with reduced liquidity
- A type of short-selling facility for hedge funds
Correct answer: A private exchange for large institutional trades that can signal hidden supply/demand
Dark pools are private venues where large institutional orders are executed away from public exchanges, and unusually large prints appearing on the tape can signal institutional interest.
Question 4: Which of the following best describes 'delta-neutral' day trading?
- Trading only stocks with zero beta
- Constructing a position where gains and losses from directional moves cancel out (Correct answer)
- Avoiding all options trades for the day
- Trading only at market open and close
Correct answer: Constructing a position where gains and losses from directional moves cancel out
Delta-neutral strategies balance positive and negative deltas in a portfolio so that small directional moves in the underlying asset have minimal net impact on the position.
Question 5: What is 'internalization' in the context of retail order flow?
- A broker keeping customer orders in-house rather than routing to exchanges (Correct answer)
- Moving profits to an offshore account
- Converting a day trade to a swing trade
- Executing trades during extended hours sessions
Correct answer: A broker keeping customer orders in-house rather than routing to exchanges
Internalization occurs when a broker or market maker fills a retail customer's order from its own inventory instead of routing it to a public exchange, which can affect price improvement.
Question 6: When using a tick chart instead of a time-based chart, what determines when a new candle forms?
- A fixed time interval such as 1 minute
- A set number of individual trades regardless of time (Correct answer)
- A fixed dollar volume threshold
- The market's closing of the previous session
Correct answer: A set number of individual trades regardless of time
Tick charts form a new bar after a specified number of individual transactions occur, so they expand during high activity periods and contract during slow periods.
Question 7: What is the significance of 'gamma risk' for day traders who hold short options positions?
- Gamma risk only affects long-term position holders
- Short options positions can lose value rapidly as expiration approaches and the underlying moves (Correct answer)
- Gamma decreases as options approach expiration
- Short gamma positions benefit from large price swings
Correct answer: Short options positions can lose value rapidly as expiration approaches and the underlying moves
Short gamma means the position's delta changes adversely as the underlying moves, and this effect accelerates near expiration, creating potential for rapid losses.
Day Trading Advanced Topics 2
What is the primary purpose of using a Volume Weighted Average Price (VWAP) in day trading?