Options Trading Advanced Options Techniques 2 — Questions and Answers
Question 1: What is a 'condor spread' in options?
- A spread with four legs using different strikes but no short options closer to the money (Correct answer)
- A two-legged spread using calls and puts
- An options position that profits from high volatility
- A strategy using four options at the same strike price
Correct answer: A spread with four legs using different strikes but no short options closer to the money
A condor spread uses four different strike prices with the same expiration, with the two short strikes further from each other than in a butterfly spread.
Question 2: What distinguishes a 'butterfly spread' from an 'iron condor'?
- A butterfly uses all calls or all puts; an iron condor uses both calls and puts (Correct answer)
- A butterfly has unlimited risk; an iron condor has defined risk
- A butterfly uses two strikes; an iron condor uses three
- A butterfly profits from high volatility; an iron condor profits from low volatility
Correct answer: A butterfly uses all calls or all puts; an iron condor uses both calls and puts
A butterfly spread uses only calls or only puts (or a combination of all-calls/all-puts), while an iron condor uses both calls and puts in a combined spread.
Question 3: What is 'gamma scalping' in advanced options trading?
- Dynamically delta-hedging a long gamma position to profit from price movement (Correct answer)
- Selling short-dated options repeatedly to collect theta
- Buying gamma to hedge a short vega position
- Scaling into a position based on changes in gamma
Correct answer: Dynamically delta-hedging a long gamma position to profit from price movement
Gamma scalping involves delta-hedging a long gamma (long straddle/strangle) position by buying and selling shares as the underlying moves, capturing profits from oscillation.
Question 4: What is the maximum profit of a long butterfly spread?
- The distance between the middle and outer strikes minus the net premium paid (Correct answer)
- Unlimited profit if the stock moves far in one direction
- The total premium collected from all short options
- The full width of the spread at expiration
Correct answer: The distance between the middle and outer strikes minus the net premium paid
Maximum profit for a long butterfly occurs when the stock closes exactly at the middle strike at expiration, equal to the wing width minus the net debit paid.
Question 5: What is a 'jade lizard' options strategy?
- Selling an OTM put and an OTM call spread simultaneously to collect premium with no upside risk (Correct answer)
- Buying an OTM call and selling an OTM put spread
- Selling both a put spread and call spread around the current price
- A long call plus a short strangle to create a synthetic position
Correct answer: Selling an OTM put and an OTM call spread simultaneously to collect premium with no upside risk
A jade lizard combines a short OTM put with a short OTM call spread, structured so the total premium collected exceeds the call spread width, eliminating upside risk.
Question 6: What does 'legging into' a spread mean in options trading?
- Executing each leg of a multi-leg spread separately rather than simultaneously (Correct answer)
- Adding legs to an existing position to increase size
- Entering a spread position at a specific price point
- Slowly building a large options position over multiple days
Correct answer: Executing each leg of a multi-leg spread separately rather than simultaneously
Legging in means executing the components of a multi-leg spread one at a time, which can lower costs but introduces the risk that market conditions change between executions.
Options Trading Advanced Options Techniques 2
What is a 'condor spread' in options?