Options Trading Options Greeks and Risk Management 2

Question 1

At-the-money options typically have a delta close to:

Accepted Answer

0.50

Answer

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?

Accepted Answer

High volatility in either direction

Answer

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?

Accepted Answer

The premium paid

Answer

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:

Accepted Answer

At-the-money with more time to expiration

Answer

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'?

Accepted Answer

Short straddle

Answer

A short straddle involves selling both a call and a put, profiting when the underlying stays near the strike price and volatility decreases.

Options Trading Practice Test