Options Trading For Beginners 3 — Questions and Answers
Question 1: What does buying a put option give the holder the right to do?
- Buy the underlying at the strike price
- Sell the underlying at the strike price before expiration (Correct answer)
- Collect interest on the strike
- Vote on company matters
Correct answer: Sell the underlying at the strike price before expiration
A put option grants the right to sell the underlying at the strike price.
Question 2: A put option becomes more valuable when the underlying stock:
- Rises sharply
- Falls in price (Correct answer)
- Stays flat
- Pays a dividend
Correct answer: Falls in price
Puts gain value as the stock price declines below the strike.
Question 3: An investor who owns 100 shares and buys a put is using a strategy called:
- Covered call
- Protective put (Correct answer)
- Naked put
- Iron condor
Correct answer: Protective put
A protective put hedges a long stock position against a price decline.
Question 4: What is 'intrinsic value' of an option?
- The premium minus commissions
- The in-the-money portion of the option's price (Correct answer)
- The time remaining until expiration
- The implied volatility level
Correct answer: The in-the-money portion of the option's price
Intrinsic value is the amount by which an option is in the money.
Question 5: What is 'time value' in an option's premium?
- The intrinsic value
- The portion above intrinsic value reflecting time to expiration (Correct answer)
- The strike price
- The dividend yield
Correct answer: The portion above intrinsic value reflecting time to expiration
Time value is the part of the premium beyond intrinsic value, reflecting potential future movement before expiration.
Question 6: A put option is 'in the money' when the stock price is:
- Above the strike
- Below the strike (Correct answer)
- Equal to the strike
- Equal to the premium
Correct answer: Below the strike
A put has intrinsic value when the stock trades below its strike price.
Question 7: American-style options can be exercised:
- Only at expiration
- Any time before or at expiration (Correct answer)
- Only on the first of the month
- Never
Correct answer: Any time before or at expiration
American-style options allow exercise at any point up to and including expiration.
Options Trading For Beginners 3
What does buying a put option give the holder the right to do?