Options Trading Options Market Mechanics 1 — Questions and Answers
Question 1: What is 'open interest' in the options market?
- The total number of outstanding options contracts that have not been settled (Correct answer)
- The number of options trades executed in a single day
- The difference between bid and ask prices
- The total premium collected on all open positions
Correct answer: The total number of outstanding options contracts that have not been settled
Open interest represents the total number of open (unsettled) options contracts currently held by market participants.
Question 2: In the U.S., one standard equity options contract typically represents how many shares?
- 100 shares (Correct answer)
- 10 shares
- 1,000 shares
- 1 share
Correct answer: 100 shares
One standard U.S. equity options contract represents 100 shares of the underlying stock, so premiums are multiplied by 100.
Question 3: What is the 'bid-ask spread' in options trading?
- The difference between the highest price a buyer will pay and the lowest price a seller will accept (Correct answer)
- The difference between the strike price and the stock price
- The spread between two different strike prices in a spread strategy
- The difference between implied and historical volatility
Correct answer: The difference between the highest price a buyer will pay and the lowest price a seller will accept
The bid-ask spread is the gap between what buyers are willing to pay (bid) and what sellers are asking (ask), representing a transaction cost for traders.
Question 4: What does 'assignment' mean in options trading?
- The obligation to fulfill the option contract when the holder exercises it (Correct answer)
- Being assigned a new options position by your broker
- The process of rolling an option to a new expiration
- When an option is automatically closed at expiration
Correct answer: The obligation to fulfill the option contract when the holder exercises it
Assignment occurs when the holder of an option exercises their right, obligating the option seller to buy or sell shares at the agreed strike price.
Question 5: What is the last day an American-style option can be exercised?
- The expiration date (Correct answer)
- The settlement date
- Three days before expiration
- The trading day after expiration
Correct answer: The expiration date
American-style options can be exercised on any trading day up to and including the expiration date.
Question 6: What happens to an in-the-money option that is not sold or exercised by expiration?
- It is automatically exercised by the broker (Correct answer)
- It expires worthless
- It is rolled to the next expiration automatically
- It is converted into a futures contract
Correct answer: It is automatically exercised by the broker
In-the-money options are typically automatically exercised at expiration by the Options Clearing Corporation (OCC) if they are $0.01 or more in the money.
Options Trading Options Market Mechanics 1
What is 'open interest' in the options market?