Series 3 – The National Commodities Futures Test Options on Futures Contracts 2

Question 1

What does it mean to 'write' an options contract?

Accepted Answer

To sell an option, becoming the grantor of the rights conveyed

Answer

To record the purchase of an option in a brokerage account in writing

Answer

To exercise an option before its expiration date

Answer

To transfer an existing option position to another party

Question 2

What is the maximum loss potential for a writer (seller) of an uncovered call option?

Accepted Answer

Theoretically unlimited

Answer

Limited to the premium received for writing the option

Answer

Limited to the strike price of the option contract

Answer

Limited to the margin requirement set by the exchange

Question 3

A put option is 'out-of-the-money' when:

Accepted Answer

The underlying futures price is above the strike price

Answer

The underlying futures price is below the strike price

Answer

The option has no time value remaining before expiration

Answer

The option premium exceeds the value of the underlying futures contract

Question 4

What is 'delta' in the context of options on futures?

Accepted Answer

The change in an option's premium for a one-unit change in the underlying futures price

Answer

The change in an option's time value relative to time passing

Answer

The difference between the call premium and put premium at the same strike price

Answer

The implied volatility measure embedded in the option's price

Question 5

Which factor, when it increases, generally causes options premiums to rise?

Accepted Answer

Volatility of the underlying futures price

Answer

Time to expiration decreasing toward zero

Answer

The option moving further out-of-the-money

Answer

Short-term interest rates declining

Question 6

What happens to the premium paid for an option that expires out-of-the-money?

Accepted Answer

It is retained in full by the option writer as profit

Answer

It is returned to the option buyer by the exchange

Answer

It is held in an escrow account by the clearinghouse

Answer

It is applied as credit toward the next options contract purchased

Question 7

An options holder who wants to close out their long position before expiration without exercising typically does so by:

Accepted Answer

Selling an identical option in the market to create an offsetting position

Answer

Letting the option expire and collecting a residual payment

Answer

Requesting the exchange to cancel the outstanding contract

Answer

Delivering the underlying commodity to satisfy the contract