Options Trading for Beginners Test 1 — Questions and Answers
Question 1: A call option with a strike price of Rs. 150 was purchased for Rs. 10 in premium, and the share price at expiration will be Rs. 172. The overall profit is _______.
- 32
- 22 (Correct answer)
- 14
- 38
Correct answer: 22
For a call option, the intrinsic value at expiration is the difference between the share price and the strike price, provided it's positive. Here, the share price (Rs. 172) is higher than the strike price (Rs. 150), so the option is in-the-money by Rs. 22 (172 - 150). If the question asks for 'overall profit' and the answer is 22, it refers to this gross profit from exercising the option, before deducting the premium paid.
Question 2: For an option buyer, the Intrinsic Value Minimum and Maximum are _______, respectively.
- 0 and unlimited (Correct answer)
- 0 and limited
- Limited and unlimited
- None of the options are correct
Correct answer: 0 and unlimited
The intrinsic value of any option can never be negative; at its lowest, it is zero (when out-of-the-money or at-the-money). For a call option buyer, the potential upside, and thus the intrinsic value, is theoretically unlimited as the underlying asset's price can rise indefinitely.
Question 3: Choosing the strike price ________.
- As of the expiration
- At the time the deal was signed (Correct answer)
- Never been accepted
- Any moment throughout the term of the agreement
Correct answer: At the time the deal was signed
The strike price is a fixed term of an option contract that is determined and agreed upon at the moment the contract is initiated or purchased. It remains constant throughout the life of that specific option contract and cannot be changed later.
Question 4: The intrinsic value of a call option cannot be negative from the sellers' or writers' standpoint.
- True (Correct answer)
- False
- Sometimes
Correct answer: True
The intrinsic value of any option, whether a call or a put, is always defined as zero or a positive value. It represents the amount by which an option is in-the-money. If an option is out-of-the-money, its intrinsic value is simply zero, never a negative amount, regardless of the perspective of the buyer or seller.
Question 5: ______ is another name for a Put option.
- Option Keeper
- One who is diminutive
- Someone who believes the market will rise
- Option holder (Correct answer)
Correct answer: Option holder
While 'option holder' generally refers to the buyer of any option, including a put option, this question's phrasing is somewhat ambiguous. A put option grants the *holder* the right to sell. Therefore, 'option holder' refers to the party who possesses the rights granted by the put option, making it the most relevant choice among the given options, even if not a direct synonym for the contract itself.
Question 6: Define a Put Option
- The right to purchase the underlying asset at maturity or earlier
- Having the ability to vote in company board meetings
- The right to sell the underlying asset at maturity or earlier (Correct answer)
- All options are correct
Correct answer: The right to sell the underlying asset at maturity or earlier
A put option is a financial contract that gives the buyer the right, but not the obligation, to sell a specified quantity of an underlying asset at a predetermined price (the strike price) on or before a specific expiration date. This option is typically bought by investors who anticipate a decline in the underlying asset's price.
Question 7: The contract for an Out of Money Put Option is
- One where the strike price is higher than the spot price (Correct answer)
- One in which the strike price and the spot price are the someone in which the strike price and the spot price are the same
- A striking price that is higher than the spot price
- None of the options are correct
Correct answer: One where the strike price is higher than the spot price
A put option is considered 'out-of-the-money' (OTM) when its strike price is higher than the current market price (spot price) of the underlying asset. In this situation, exercising the option would be unprofitable because the holder could sell the asset for a higher price in the open market.
Options Trading for Beginners Test 1
A call option with a strike price of Rs. 150 was purchased for Rs. 10 in premium, and the share price at expiration will be Rs. 172.
The overall profit is _______.