Stock Broker Options Trading & Strategies 1

Question 1

What is a call option?

Accepted Answer

The right to buy shares at a specified strike price

Answer

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?

Accepted Answer

$10

Answer

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?

Accepted Answer

The strike price is below the current market price

Answer

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?

Accepted Answer

The premium paid for the option

Answer

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?

Accepted Answer

Short straddle

Answer

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.

Stock Broker Practice Test

Stock Broker Practice Test

Stock Broker Options Trading & Strategies 1