Options Trading Options Trading Strategy Test 2 — Questions and Answers
Question 1: A long straddle profits when the underlying stock does what?
- Stays flat near the strike
- Makes a large move in either direction (Correct answer)
- Rises only slightly
- Pays a dividend
Correct answer: Makes a large move in either direction
A long straddle buys a call and put at the same strike and profits from a large move up or down.
Question 2: What is the maximum loss on a long call option?
- Unlimited
- The strike price
- The premium paid (Correct answer)
- The breakeven price
Correct answer: The premium paid
A long call's maximum loss is limited to the premium paid for the option.
Question 3: A covered call strategy involves owning the stock and doing what?
- Buying a put
- Selling a call against it (Correct answer)
- Buying another call
- Shorting the stock
Correct answer: Selling a call against it
A covered call sells a call option against shares already owned to generate premium income.
Question 4: In a bull call spread, you buy a lower-strike call and do what with a higher-strike call?
- Buy it
- Sell it (Correct answer)
- Exercise it
- Let it expire
Correct answer: Sell it
A bull call spread buys a lower-strike call and sells a higher-strike call to reduce cost and cap profit.
Question 5: The breakeven point of a long put is calculated as:
- Strike plus premium
- Strike minus premium (Correct answer)
- Premium minus strike
- Strike times premium
Correct answer: Strike minus premium
A long put breaks even at the strike price minus the premium paid.
Question 6: Which strategy has limited risk and limited reward?
- Naked call
- Long stock
- Vertical credit spread (Correct answer)
- Short straddle
Correct answer: Vertical credit spread
A vertical credit spread caps both maximum profit and maximum loss with defined strikes.
Question 7: An iron condor is constructed using how many option legs?
- Two
- Three
- Four (Correct answer)
- Five
Correct answer: Four
An iron condor combines a bull put spread and a bear call spread for four total legs.
Options Trading Options Trading Strategy Test 2
A long straddle profits when the underlying stock does what?