Options Trading Options Income Strategies 2 — Questions and Answers
Question 1: What is an iron condor options strategy?
- A combination of a bull put spread and a bear call spread (Correct answer)
- Buying both a call and a put at the same strike
- Selling a call and put at the same strike price
- Buying four different call options at increasing strikes
Correct answer: A combination of a bull put spread and a bear call spread
An iron condor combines a bull put spread (sell lower put, buy even lower put) and a bear call spread (sell higher call, buy even higher call) to profit from low volatility.
Question 2: What is the primary goal of selling a covered call on a stock you own long-term?
- To generate additional income from the position (Correct answer)
- To hedge against a market crash
- To increase delta exposure to the stock
- To reduce the stock's implied volatility
Correct answer: To generate additional income from the position
Selling covered calls generates extra income (premium) on top of any dividends, enhancing the overall return of a long stock position.
Question 3: Which income strategy has defined risk on both the upside and downside?
- Iron condor (Correct answer)
- Short strangle
- Short straddle
- Covered call
Correct answer: Iron condor
An iron condor has defined maximum loss because the long options purchased define the maximum risk on both the call and put sides.
Question 4: At what point does a sold (short) put reach maximum profit?
- At expiration with the stock above the strike price (Correct answer)
- At expiration with the stock below the strike price
- Immediately after selling the put
- When implied volatility rises sharply
Correct answer: At expiration with the stock above the strike price
A short put reaches maximum profit when the option expires worthless with the stock price above the strike price, allowing the seller to keep the full premium.
Question 5: What is the maximum loss for an iron condor position?
- Width of the widest spread minus the net premium received (Correct answer)
- The total premium received from all four legs
- Unlimited loss on the call side
- The difference between the two call strikes only
Correct answer: Width of the widest spread minus the net premium received
The maximum loss for an iron condor is the width of the widest spread (in points) minus the net premium received, occurring when the stock blows through one of the short strikes.
Question 6: Which condition most benefits a short strangle seller?
- The underlying price stays between the two short strikes at expiration (Correct answer)
- A large move up in the underlying price
- A large move down in the underlying price
- A sharp spike in implied volatility
Correct answer: The underlying price stays between the two short strikes at expiration
A short strangle seller profits most when the underlying price remains between the two short strikes at expiration, allowing both sold options to expire worthless.
Options Trading Options Income Strategies 2
What is an iron condor options strategy?