Trading Jobs Options Trading Fundamentals 1 — Questions and Answers
Question 1: What does a 'call option' give the buyer the right to do?
- Sell shares at the strike price
- Buy shares at the strike price (Correct answer)
- Short sell shares at market price
- Receive dividends from the underlying stock
Correct answer: Buy shares at the strike price
A call option gives the buyer the right, but not the obligation, to purchase the underlying security at the specified strike price.
Question 2: What is the maximum loss for a buyer of a put option?
- Unlimited
- Strike price minus premium
- The premium paid (Correct answer)
- Strike price only
Correct answer: The premium paid
The maximum loss for an option buyer is limited to the premium paid, since they can simply let the option expire worthless.
Question 3: An option that can be exercised only at expiration is called what type?
- American-style
- European-style (Correct answer)
- Bermudan-style
- Asian-style
Correct answer: European-style
European-style options can only be exercised on the expiration date, unlike American-style options which can be exercised any time before expiration.
Question 4: What is 'intrinsic value' in options terminology?
- The time value remaining in the option
- The amount by which an option is in-the-money (Correct answer)
- The volatility premium built into the price
- The difference between bid and ask prices
Correct answer: The amount by which an option is in-the-money
Intrinsic value is the amount an option is in-the-money — for a call, it's the stock price minus the strike price (when positive).
Question 5: Which Greek measures the sensitivity of an option's price to changes in the underlying asset's price?
- Theta
- Vega
- Delta (Correct answer)
- Gamma
Correct answer: Delta
Delta measures how much an option's price changes for every $1 move in the underlying asset's price.
Question 6: What is the term for selling an option without owning the underlying security?
- Covered writing
- Naked writing (Correct answer)
- Protective writing
- Spread writing
Correct answer: Naked writing
Naked (or uncovered) writing means selling an option without holding the underlying security, creating potentially unlimited risk for naked calls.
Trading Jobs Options Trading Fundamentals 1
What does a 'call option' give the buyer the right to do?