Stock Trading Stock Trading Options & Derivatives 3

Question 1

Gamma in options trading measures:

Accepted Answer

The rate of change of delta for a one-point move in the underlying asset

Answer

Gamma measures how much delta changes when the underlying stock moves $1, and is highest for at-the-money options near expiration.

Question 2

The Black-Scholes model is primarily used to:

Accepted Answer

Calculate the theoretical fair value of European-style options

Answer

The Black-Scholes model uses inputs including stock price, strike price, time to expiration, risk-free rate, and volatility to compute the theoretical price of a European option.

Question 3

A futures contract differs from an options contract in that:

Accepted Answer

Futures obligate both parties to transact at a specified price on a future date

Answer

Unlike options where the buyer has a right but no obligation, a futures contract binds both buyer and seller to complete the transaction at the agreed price and date.

Question 4

Vega measures an option's sensitivity to changes in:

Accepted Answer

Implied volatility

Answer

Vega quantifies how much an option's price changes for a one-percentage-point change in implied volatility; long options have positive vega and benefit from rising IV.

Question 5

What is the primary risk to the seller (writer) of a naked call option?

Accepted Answer

The underlying stock could rise without limit, creating theoretically unlimited losses

Answer

A naked (uncovered) call seller faces unlimited theoretical loss because the stock price can rise indefinitely, while the seller must deliver shares at the below-market strike price.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Stock Trading Options & Derivatives 3