Options Trading Options Pricing and Valuation 3

Question 1

An option's extrinsic value is also known as:

Accepted Answer

Time value

Answer

Extrinsic value is synonymous with time value — the portion of the option premium beyond its intrinsic value.

Question 2

When implied volatility rises sharply, what typically happens to option premiums?

Accepted Answer

Both put and call premiums increase

Answer

Rising implied volatility increases uncertainty, which inflates both call and put option premiums simultaneously.

Question 3

What is 'IV crush' in options trading?

Accepted Answer

A sharp drop in implied volatility after a major event like earnings

Answer

IV crush refers to the rapid decline in implied volatility that typically occurs after a major anticipated event like earnings releases, causing option premiums to fall sharply.

Question 4

Which options pricing variable most directly affects an option's theoretical fair value according to Black-Scholes?

Accepted Answer

Implied volatility

Answer

Implied volatility is the most dynamic and impactful input in Black-Scholes, directly driving the model's output for option fair value.

Question 5

What does a 'volatility skew' indicate in equity options markets?

Accepted Answer

Out-of-the-money puts have higher IV than out-of-the-money calls

Answer

Volatility skew in equities shows that OTM puts typically carry higher implied volatility than OTM calls, reflecting demand for downside protection.

Options Trading Practice Test

Options Trading Practice Test

Options Trading Options Pricing and Valuation 3