Options Trading for Beginners Test 1

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 _______.

Accepted Answer

22

Answer

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.

Accepted Answer

0 and unlimited

Answer

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 ________.

Accepted Answer

At the time the deal was signed

Answer

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.

Accepted Answer

True

Answer

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.

Accepted Answer

Option holder

Answer

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.

Options Trading Practice Test

Options Trading Practice Test

Options Trading for Beginners Test 1