Options Trading Millionaires 2 — Questions and Answers
Question 1: Why is selling cash-secured puts a strategy some wealthy traders favor for building positions?
- It collects premium while agreeing to buy stock at a lower price (Correct answer)
- It guarantees the stock will rise
- It removes all downside risk
- It requires no capital to open
Correct answer: It collects premium while agreeing to buy stock at a lower price
A cash-secured put earns premium income and obligates the seller to buy shares at the strike if assigned, often at a desired entry price.
Question 2: What does 'theta decay' work in favor of?
- Option buyers
- Option sellers (Correct answer)
- Stock shorts
- Bond holders
Correct answer: Option sellers
Theta measures time decay, which erodes option value daily and benefits the seller who collects premium.
Question 3: A trader buys a call and sells a higher-strike call on the same stock and expiration. What is this called?
- Bull call spread (Correct answer)
- Iron condor
- Naked put
- Covered straddle
Correct answer: Bull call spread
Buying a lower-strike call and selling a higher-strike call forms a bull call spread, a defined-risk bullish trade.
Question 4: Why might a millionaire trader prefer defined-risk spreads over naked options?
- Maximum loss is known in advance (Correct answer)
- They always profit more
- They expire worthless
- They avoid commissions
Correct answer: Maximum loss is known in advance
Spreads cap potential loss, protecting capital from catastrophic moves that naked options could cause.
Question 5: What is the primary risk of selling naked call options?
- Theoretically unlimited loss (Correct answer)
- Losing only the premium
- No risk at all
- Forced dividend payment
Correct answer: Theoretically unlimited loss
A naked call has unlimited loss potential because a stock can rise without limit.
Question 6: How does implied volatility typically affect option premiums?
- Higher IV raises premiums (Correct answer)
- Higher IV lowers premiums
- IV has no effect
- IV only affects stocks
Correct answer: Higher IV raises premiums
Higher implied volatility increases the expected price range, raising option premiums.
Question 7: Why do experienced traders often sell options when implied volatility is high?
- Premiums are inflated and likely to contract (Correct answer)
- Premiums are cheapest then
- It is required by brokers
- IV cannot fall
Correct answer: Premiums are inflated and likely to contract
High IV inflates premiums, so sellers collect more and benefit when volatility reverts lower.
Options Trading Millionaires 2
Why is selling cash-secured puts a strategy some wealthy traders favor for building positions?