Options Trading Options Greeks and Risk Management 2 — Questions and Answers
Question 1: At-the-money options typically have a delta close to:
- 0.50 (Correct answer)
- 1.00
- 0.00
- 0.25
Correct answer: 0.50
At-the-money options have a delta of approximately 0.50, reflecting roughly equal probability of expiring in or out of the money.
Question 2: Which risk scenario does a long straddle position primarily hedge against?
- High volatility in either direction (Correct answer)
- Rising prices only
- Falling prices only
- Stable sideways markets
Correct answer: High volatility in either direction
A long straddle profits when the underlying asset makes a large move in either direction, benefiting from high volatility.
Question 3: What is the maximum loss for a buyer of a put option?
- The premium paid (Correct answer)
- The strike price of the option
- Unlimited
- The current price of the underlying
Correct answer: The premium paid
The maximum loss for a put option buyer is limited to the premium paid for the option.
Question 4: Vega is highest for options that are:
- At-the-money with more time to expiration (Correct answer)
- Deep in-the-money with little time left
- Far out-of-the-money with one day to expiry
- In-the-money at expiration
Correct answer: At-the-money with more time to expiration
Vega is greatest for at-the-money options with longer time to expiration since they have the most uncertainty about where the price will end up.
Question 5: Which strategy is best described as 'selling volatility'?
- Short straddle (Correct answer)
- Long straddle
- Long call
- Long put
Correct answer: Short straddle
A short straddle involves selling both a call and a put, profiting when the underlying stays near the strike price and volatility decreases.
Question 6: If an option has a gamma of 0.05 and delta of 0.40, after a $1 rise in the underlying, the new delta will be approximately:
- 0.45 (Correct answer)
- 0.35
- 0.50
- 0.40
Correct answer: 0.45
Gamma of 0.05 means delta increases by 0.05 for every $1 rise in the underlying, making the new delta 0.45.
Options Trading Options Greeks and Risk Management 2
At-the-money options typically have a delta close to: