Options Trading Advanced Options Techniques 1 — Questions and Answers
Question 1: What is a 'ratio spread' in options trading?
- Buying one option and selling more than one option at a different strike (Correct answer)
- Buying and selling equal numbers of options at different strikes
- Buying two options for every one sold
- Selling a single option against 100 shares of stock
Correct answer: Buying one option and selling more than one option at a different strike
A ratio spread involves buying one option and selling a greater number of options at a different strike, creating an asymmetric risk/reward profile.
Question 2: What is a 'calendar spread' (also called a 'time spread')?
- Buying a longer-dated option and selling a shorter-dated option at the same strike (Correct answer)
- Buying options across multiple strikes in the same expiration
- Selling options in one month and buying in the next month at different strikes
- A spread created between two different underlying assets
Correct answer: Buying a longer-dated option and selling a shorter-dated option at the same strike
A calendar spread involves buying a longer-dated option and selling a shorter-dated option at the same strike price, profiting from accelerating time decay on the short leg.
Question 3: What is a 'diagonal spread' in options?
- Buying a longer-dated option and selling a shorter-dated option at a different strike (Correct answer)
- Buying and selling options on the same expiration at different strikes
- Selling options diagonally across multiple assets
- A spread with equal long and short positions at every strike
Correct answer: Buying a longer-dated option and selling a shorter-dated option at a different strike
A diagonal spread combines elements of both a calendar spread and a vertical spread — different strikes AND different expirations.
Question 4: What is a 'synthetic long stock' position in options?
- Buying a call and selling a put at the same strike and expiration (Correct answer)
- Buying calls only without any put positions
- Selling puts to generate income like a dividend stock
- Buying deep ITM calls to simulate stock ownership
Correct answer: Buying a call and selling a put at the same strike and expiration
A synthetic long stock is created by buying a call and selling a put at the same strike and expiration, replicating the risk/reward profile of owning the stock.
Question 5: What is a 'backspread' in options trading?
- Selling fewer options than you buy, seeking to profit from a large move (Correct answer)
- Buying fewer options than you sell to maximize premium income
- A strategy where you reverse a prior spread position
- Selling back-month options and buying front-month options
Correct answer: Selling fewer options than you buy, seeking to profit from a large move
A backspread (reverse ratio spread) involves selling fewer options than you buy, positioning for a large directional move while limiting risk if the market stays flat.
Question 6: What is the primary advantage of using a 'vertical spread' over buying a single option?
- It reduces the cost basis and lowers breakeven point (Correct answer)
- It increases unlimited profit potential
- It eliminates all theta decay from the position
- It allows the trader to profit from both rising and falling markets
Correct answer: It reduces the cost basis and lowers breakeven point
A vertical spread reduces the net premium paid by selling one option to offset the cost of buying another, lowering the breakeven point even though it caps maximum profit.
Options Trading Advanced Options Techniques 1
What is a 'ratio spread' in options trading?