Stock Broker Options Trading & Strategies 2

Question 1

A covered call strategy involves:

Accepted Answer

Selling a call option while owning the underlying stock

Answer

Buying both a call and a put on the same stock

Answer

Selling a call without holding any underlying shares

Answer

Buying a call on a stock you plan to sell short

Question 2

What is the maximum profit for an investor who writes a covered call?

Accepted Answer

The premium received plus any stock gains up to the strike price

Answer

Unlimited appreciation in the stock price

Answer

The full intrinsic value of the call at expiration

Answer

The premium received only, regardless of stock movement

Question 3

A protective put strategy is primarily used to:

Accepted Answer

Hedge against a drop in value of a stock you already own

Answer

Generate income on an existing stock position

Answer

Speculate on a declining stock

Answer

Replace a stop-loss order at no cost

Question 4

What does 'out of the money' mean for a put option?

Accepted Answer

The current stock price is above the strike price

Answer

The current stock price is below the strike price

Answer

The option has reached its expiration date

Answer

The option has been assigned to the writer

Question 5

An investor writes an uncovered (naked) call. What is their maximum potential loss?

Accepted Answer

Theoretically unlimited, as the stock price can rise indefinitely

Answer

The premium received from writing the call

Answer

The strike price minus the premium received

Answer

The intrinsic value of the option at expiration

Question 6

What is the 'time value' component of an option's premium?

Accepted Answer

The portion of the premium that exceeds the option's intrinsic value

Answer

The amount by which the option is in the money

Answer

The strike price minus the current market price

Answer

The number of trading days remaining until expiration

Question 7

How does time decay (theta) affect an option's time value as expiration approaches?

Accepted Answer

Time value decreases as expiration approaches, accelerating in the final weeks

Answer

Time value increases steadily as expiration approaches

Answer

Time value remains constant until the final trading day

Answer

Time value converts entirely to intrinsic value at expiration