Stock Broker Options Trading & Strategies 1 — Questions and Answers
Question 1: What is a call option?
- The right to buy shares at a specified strike price (Correct answer)
- The right to sell shares at a specified strike price
- The obligation to buy shares at the current market price
- The obligation to sell shares at the strike price
Correct answer: The right to buy shares at a specified strike price
A call option grants the holder the right, but not the obligation, to purchase the underlying shares at the strike price before or on the expiration date.
Question 2: An investor buys a put option with a $50 strike price when the stock is trading at $40. What is the intrinsic value of this put?
- $0
- $40
- $10 (Correct answer)
- $50
Correct answer: $10
A put option's intrinsic value equals the strike price minus the current stock price when in the money: $50 − $40 = $10.
Question 3: What does 'in the money' mean for a call option?
- The strike price is above the current market price
- The strike price equals the current market price
- The strike price is below the current market price (Correct answer)
- The option has no intrinsic value
Correct answer: The strike price is below the current market price
A call option is in the money when the underlying stock's current price exceeds the strike price, giving the option positive intrinsic value.
Question 4: What is the maximum loss for a buyer of a call option?
- The strike price of the option
- The premium paid for the option (Correct answer)
- The current market value of the underlying stock
- Unlimited
Correct answer: The premium paid for the option
The maximum loss for a call buyer is limited to the premium paid, because the worst outcome is the option expiring worthless.
Question 5: Which strategy profits most in a neutral market where the stock price remains flat near the strike price?
- Long straddle
- Long call
- Short straddle (Correct answer)
- Protective put
Correct answer: Short straddle
A short straddle (selling both a call and a put at the same strike) collects premium income and is most profitable when the stock price stays near the strike at expiration.
Question 6: What is the options premium?
- The strike price of the contract
- The intrinsic value only of the option
- The price paid by the buyer to acquire the option contract (Correct answer)
- The difference between the call price and the put price
Correct answer: The price paid by the buyer to acquire the option contract
The premium is the total market price of the option contract paid by the buyer to the seller in exchange for the rights the contract conveys.
Question 7: When does a long call option expire worthless?
- When the stock price exceeds the strike price at expiration
- When the option is exercised early by the holder
- When the stock price is at or below the strike price at expiration (Correct answer)
- When the option is assigned to the writer
Correct answer: When the stock price is at or below the strike price at expiration
A long call expires worthless when the stock price is at or below the strike price, because exercising the right to buy at the strike would be economically irrational.
