FINRA Options and Derivatives Flashcards

What is 'delta' in options trading?

Answer: The rate of change in an option's price for a $1 change in the underlying security's price

Delta measures how much an option's price is expected to move for every $1 change in the underlying security, ranging from 0 to 1 for calls and -1 to 0 for puts.

What is 'implied volatility' in the context of options?

Answer: The market's expectation of future price volatility of the underlying asset, derived from option prices

Implied volatility reflects the market's consensus forecast of how much the underlying asset's price will fluctuate, and is extracted from current option market prices.

What is a 'futures contract'?

Answer: A standardized legal agreement to buy or sell an asset at a predetermined price at a specified future date

A futures contract is a standardized, exchange-traded agreement obligating both parties to transact a specified asset at an agreed price on a set future date.

Which of the following describes a 'bull call spread'?

Answer: Buying a call at a lower strike price and selling a call at a higher strike price on the same underlying

A bull call spread involves buying a call at a lower strike and selling a call at a higher strike with the same expiration, limiting both maximum profit and maximum loss.

What does it mean to 'exercise' an options contract?

Answer: The option holder invokes their right to buy or sell the underlying security at the strike price

Exercising an option means the holder uses their contractual right to buy (call) or sell (put) the underlying security at the agreed strike price.

Under FINRA rules, which document must be provided to customers before or at the time of opening an options account?

Answer: Characteristics and Risks of Standardized Options (ODD)

The Options Disclosure Document (ODD), titled 'Characteristics and Risks of Standardized Options,' must be delivered to customers before or at the time of account approval for options trading.