Stock Trading Stock Trading Options & Derivatives 1

Question 1

A call option gives the buyer the right, but not the obligation, to:

Accepted Answer

Buy shares at the strike price before expiration

Answer

A call option grants the holder the right to purchase the underlying asset at the specified strike price on or before the expiration date.

Question 2

A call option is considered 'in the money' (ITM) when:

Accepted Answer

The strike price is below the current stock price

Answer

A call is in the money when the underlying stock's market price exceeds the strike price, giving it intrinsic value.

Question 3

What is the maximum loss a buyer of a call option can incur?

Accepted Answer

The premium paid for the option

Answer

An option buyer's maximum loss is limited to the premium paid, because they can simply let the option expire worthless.

Question 4

What does the 'strike price' of an option represent?

Accepted Answer

The predetermined price at which the option can be exercised

Answer

The strike price (also called exercise price) is the fixed price specified in the option contract at which the holder can buy or sell the underlying asset.

Question 5

Which options Greek measures the rate at which an option loses value as it approaches expiration?

Accepted Answer

Theta

Answer

Theta measures time decay — the daily erosion of an option's extrinsic (time) value as the expiration date approaches, assuming all else equal.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Stock Trading Options & Derivatives 1