Options Trading For Beginners 2 — Questions and Answers
Question 1: What does buying a call option give the holder the right to do?
- Buy the underlying at the strike price before expiration (Correct answer)
- Sell the underlying at the strike price
- Receive a dividend from the underlying
- Force the seller to buy shares
Correct answer: Buy the underlying at the strike price before expiration
A call option grants the holder the right, but not the obligation, to buy the underlying at the strike price.
Question 2: What is the maximum loss for a buyer of a single call option?
- Unlimited
- The premium paid (Correct answer)
- The strike price
- The difference between strike and stock price
Correct answer: The premium paid
A long option buyer can only lose the premium they paid for the contract.
Question 3: One standard U.S. equity option contract typically represents how many shares?
- 1
- 10
- 100 (Correct answer)
- 1000
Correct answer: 100
A standard equity option contract controls 100 shares of the underlying stock.
Question 4: A call option is 'in the money' when the stock price is:
- Above the strike price (Correct answer)
- Below the strike price
- Equal to the strike price
- Equal to the premium
Correct answer: Above the strike price
A call has intrinsic value when the stock trades above its strike price.
Question 5: What is the 'strike price' of an option?
- The current market price of the stock
- The price at which the option can be exercised (Correct answer)
- The premium cost of the option
- The broker's commission
Correct answer: The price at which the option can be exercised
The strike price is the fixed price at which the underlying can be bought or sold when exercised.
Question 6: What happens to an out-of-the-money option at expiration?
- It is automatically exercised
- It expires worthless (Correct answer)
- It converts to shares
- It rolls to next month
Correct answer: It expires worthless
An out-of-the-money option has no intrinsic value and expires worthless.
Question 7: The price paid to purchase an option is called the:
- Strike
- Premium (Correct answer)
- Margin
- Spread
Correct answer: Premium
The premium is the cost a buyer pays to the seller for the option contract.
Options Trading For Beginners 2
What does buying a call option give the holder the right to do?