Trading Jobs Options Trading Fundamentals 2 — Questions and Answers
Question 1: What is the breakeven point for a long call option?
- Strike price minus premium
- Strike price plus premium (Correct answer)
- Market price minus strike
- Premium divided by delta
Correct answer: Strike price plus premium
The breakeven for a long call is the strike price plus the premium paid, because the stock must rise above that total cost to profit.
Question 2: A 'bull call spread' involves which combination of options?
- Buy a higher-strike call, sell a lower-strike call
- Buy a lower-strike call, sell a higher-strike call (Correct answer)
- Buy two calls at the same strike
- Sell a call and buy a put at the same strike
Correct answer: Buy a lower-strike call, sell a higher-strike call
A bull call spread involves buying a call at a lower strike and selling a call at a higher strike, limiting both profit potential and premium cost.
Question 3: Which options strategy profits when implied volatility increases regardless of price direction?
- Short straddle
- Long straddle (Correct answer)
- Covered call
- Bull put spread
Correct answer: Long straddle
A long straddle (buying a call and put at the same strike) profits from large price moves or increases in implied volatility in either direction.
Question 4: What does 'Theta' represent in options trading?
- Change in delta as price moves
- Rate of time decay per day (Correct answer)
- Sensitivity to volatility changes
- Sensitivity to interest rate changes
Correct answer: Rate of time decay per day
Theta measures the daily erosion of an option's time value, representing how much value the option loses each day as expiration approaches.
Question 5: What is the options market term for when the underlying price equals the strike price?
- In-the-money
- Out-of-the-money
- At-the-money (Correct answer)
- Deep in-the-money
Correct answer: At-the-money
At-the-money (ATM) refers to when the underlying asset's current price is equal or very close to the option's strike price.
Question 6: Which measure reflects the market's expectation of future volatility as implied by option prices?
- Historical volatility
- Realized volatility
- Implied volatility (Correct answer)
- Statistical volatility
Correct answer: Implied volatility
Implied volatility is derived from an option's market price and reflects market expectations of how much the underlying will move in the future.
Trading Jobs Options Trading Fundamentals 2
What is the breakeven point for a long call option?