Options Trading Options Pricing and Valuation 1

Question 1

What model is most commonly used to price European-style options?

Accepted Answer

Black-Scholes model

Answer

The Black-Scholes model is the most widely used framework for pricing European-style options based on five key inputs.

Question 2

Which of the following is NOT an input into the Black-Scholes pricing model?

Accepted Answer

Expected future return of the stock

Answer

The Black-Scholes model uses current stock price, strike price, time to expiration, risk-free rate, and implied volatility — not expected future returns.

Question 3

What is 'intrinsic value' of an option?

Accepted Answer

The amount the option is in the money

Answer

Intrinsic value is the real, tangible value of an option — the difference between the current underlying price and the strike price for in-the-money options.

Question 4

The time value of an option is calculated as:

Accepted Answer

Option premium minus intrinsic value

Answer

Time value equals the total option premium minus the intrinsic value, representing the extra amount traders pay for the possibility of future gains.

Question 5

If a call option has a strike price of $100 and the stock is trading at $110, what is the intrinsic value?

Accepted Answer

$10

Answer

The intrinsic value is $110 - $100 = $10, since the call option is $10 in the money.

Options Trading Practice Test

Options Trading Practice Test

Options Trading Options Pricing and Valuation 1