Options Trading Options Market Mechanics 2 — Questions and Answers
Question 1: What is the role of the Options Clearing Corporation (OCC) in the U.S. options market?
- It acts as the central counterparty guaranteeing all options contracts (Correct answer)
- It sets the price of all options contracts daily
- It regulates which stocks can have listed options
- It assigns options positions to specific traders
Correct answer: It acts as the central counterparty guaranteeing all options contracts
The OCC acts as the central counterparty and guarantor for all U.S. exchange-listed options contracts, ensuring contract performance.
Question 2: What is a 'weekly option' (also called a 'weekly')?
- An option that expires on a Friday of the current or near-term week (Correct answer)
- An option that resets its strike price weekly
- An option traded only on Mondays and Fridays
- A type of option with 7-day volatility pricing
Correct answer: An option that expires on a Friday of the current or near-term week
Weekly options (weeklys) are short-dated options that expire on a Friday, offering traders a shorter time frame than standard monthly options.
Question 3: What does 'exercising' an option mean?
- Using the right granted by the option to buy or sell the underlying (Correct answer)
- Closing the option position by selling it in the market
- Rolling the option to a later expiration date
- Converting the option to a futures contract
Correct answer: Using the right granted by the option to buy or sell the underlying
Exercising an option means the holder uses their contractual right to buy (call) or sell (put) the underlying security at the strike price.
Question 4: Which type of option can only be exercised at expiration?
- European-style option (Correct answer)
- American-style option
- Bermudan option
- Asian option
Correct answer: European-style option
European-style options can only be exercised at expiration, unlike American-style options which can be exercised at any time before expiration.
Question 5: What is a 'LEAPS' option?
- A long-term equity anticipation security with expiration over one year away (Correct answer)
- A leveraged exchange-traded options product
- An option on a leveraged ETF
- A type of option on futures contracts
Correct answer: A long-term equity anticipation security with expiration over one year away
LEAPS (Long-term Equity AnticiPation Securities) are options with expiration dates more than one year in the future, allowing for longer-term directional trades.
Question 6: What is the difference between 'volume' and 'open interest' in options?
- Volume is the number of contracts traded today; open interest is all outstanding contracts (Correct answer)
- Volume measures all open positions; open interest measures daily trades
- They are the same measurement reported differently
- Volume tracks puts only; open interest tracks calls only
Correct answer: Volume is the number of contracts traded today; open interest is all outstanding contracts
Volume measures the number of contracts traded during the current trading session, while open interest counts all contracts that remain open and unsettled.
Options Trading Options Market Mechanics 2
What is the role of the Options Clearing Corporation (OCC) in the U.S. options market?