Options Trading Options Income Strategies 1 — Questions and Answers
Question 1: What is a covered call strategy?
- Selling a call option while holding the underlying stock (Correct answer)
- Buying a call option to cover a short stock position
- Selling a call option with no underlying position
- Buying a call to hedge against a short call
Correct answer: Selling a call option while holding the underlying stock
A covered call involves selling a call option against shares of stock you already own, generating income from the premium collected.
Question 2: What is the maximum profit for a covered call position?
- Strike price minus stock purchase price plus premium received (Correct answer)
- Unlimited upside like owning the stock
- The premium received only
- Strike price times number of shares
Correct answer: Strike price minus stock purchase price plus premium received
The maximum profit for a covered call is the premium received plus any gain from the stock up to the strike price.
Question 3: A cash-secured put involves:
- Selling a put option while holding enough cash to buy the shares if assigned (Correct answer)
- Buying a put option backed by cash in the account
- Selling a put to hedge a long stock position
- Buying shares and simultaneously buying a put
Correct answer: Selling a put option while holding enough cash to buy the shares if assigned
A cash-secured put means selling a put option while keeping enough cash in reserve to purchase the shares at the strike price if assigned.
Question 4: Which income strategy involves selling an out-of-the-money call and an out-of-the-money put simultaneously?
- Short strangle (Correct answer)
- Short straddle
- Iron condor
- Bull put spread
Correct answer: Short strangle
A short strangle involves selling an OTM call and an OTM put, collecting premium from both while profiting if the underlying stays between the two strikes.
Question 5: What is the breakeven price for a cash-secured put with a $50 strike and $3 premium collected?
- $47 (Correct answer)
- $53
- $50
- $47 or $53
Correct answer: $47
The breakeven for a short put is the strike price minus the premium received: $50 - $3 = $47.
Question 6: The 'wheel strategy' in options trading typically involves:
- Selling cash-secured puts until assigned, then selling covered calls (Correct answer)
- Buying calls and puts alternately to capture volatility
- Rolling options forward each week to capture theta
- Selling iron condors and reinvesting the premium
Correct answer: Selling cash-secured puts until assigned, then selling covered calls
The wheel strategy cycles between selling cash-secured puts (collecting premium until assigned shares) and then selling covered calls against those shares.
Options Trading Options Income Strategies 1
What is a covered call strategy?