Options Trading Options Trading Strategy Test 3 — Questions and Answers
Question 1: A protective put is used primarily to:
- Generate income
- Hedge a long stock position (Correct answer)
- Speculate on a crash
- Increase leverage
Correct answer: Hedge a long stock position
A protective put hedges a long stock position by setting a floor on potential losses.
Question 2: Which Greek measures an option's sensitivity to changes in the underlying price?
- Theta
- Vega
- Delta (Correct answer)
- Rho
Correct answer: Delta
Delta measures how much an option's price moves per $1 change in the underlying.
Question 3: Theta decay is generally most harmful to which position?
- Short option seller
- Long option buyer (Correct answer)
- Stock holder
- Bond holder
Correct answer: Long option buyer
Theta erodes the value of long options over time, hurting the buyer as expiration nears.
Question 4: A short strangle profits most when the underlying:
- Makes a huge move
- Trades in a narrow range (Correct answer)
- Gaps down
- Splits
Correct answer: Trades in a narrow range
A short strangle collects premium and profits when the underlying stays within a range.
Question 5: Rolling an option position typically means:
- Closing and opening a new expiration or strike (Correct answer)
- Exercising early
- Doubling the size
- Hedging with stock
Correct answer: Closing and opening a new expiration or strike
Rolling closes the current option and opens a new one at a different strike or expiration.
Question 6: A calendar spread profits primarily from:
- Large directional moves
- Differing rates of time decay between expirations (Correct answer)
- Dividend capture
- Interest rate hikes
Correct answer: Differing rates of time decay between expirations
A calendar spread exploits the faster time decay of the near-term option versus the longer-dated one.
Question 7: Implied volatility represents the market's expectation of:
- Past price movement
- Future price movement (Correct answer)
- Dividend yield
- Trading volume
Correct answer: Future price movement
Implied volatility reflects the market's forecast of the underlying's future price movement.
Options Trading Options Trading Strategy Test 3
A protective put is used primarily to: