OPTIONS TRADING FINAL EXAM (100 MULTIPLE CHOICE QUESTIONS)

1. What is an Option?
A. The right to buy or sell an asset within a stipulated time
B. The right to own the stock of other similar business company
C. The right to buy a futures contract
D. The right to question the management of the company

Answer: A

2. The other name for a Put option seller is?

A. Short Put
B. Long Put
C. Short Call
D. Married Put

Answer: A

3. What is a Put option?

A. The right to have the voting right in the company board meetings
B. The right to sell the underlying asset on or before maturity
C. The right to buy the underlying asset on or before maturity
D. All of these

Answer: B

4. When is the strike price decided?

A. Anytime during the duration of the contract
B. At the time of entering the contract
C. At the time of expiry
D. Never agreed upon

Answer: B

5. A Call option of strike price USD was bought by paying a premium of USD 10 and
the share price upon expiry is USD 193. The total profit made is:
A. 43
B. 33
C. 13
D. 53

Answer: B

6. What is an out of the money put option?

A. One where the spot price is above the strike price
B. One where the spot price and strike price are the same
C. One where the strike price is above the spot price
D. None of these
Answer: A

7. The monthly expires on last working Thursday of every month, but if the last
working day is a holiday then the option expires on:
A. The next working day i.e., Friday
B. The next Thursday
C. Does not expire
D. The previous working day i.e., Wednesday

Answer: D

8. The Minimum and Maximum Intrinsic value for an option buyer is:

A. Unlimited and unlimited

B. 0 and Unlimited
C. Unlimited and 0
D. None of these

Answer: B

9. Which of the following are benefits of writing options?

A. You get paid potential profits up front in the form of the premium
B. If the option expires out of the money, no one will want to exercise the contract
and you will keep your entire premium
C. You can close your trade at any time
D. All of the above

Answer: D

10. Before earnings season, a winning strategy is to:

Statement 1: Buy calls on stocks of the companies that are expected to report better-
than-expected earnings

Statement 2: Buy puts in companies that are expected to miss consensus earnings
estimates.

A. Both statements are True

B. Only statement 1 is True
C. Only statement 2 is True
D. Both statements are False

Answer: A

11. Bear Put spreads:

A. Are generally used when you expect that the underlying stock, index or
commodity will decline in price
B. Are generally used when you expect that the underlying stock, index or
commodity will increase in price
C. Can work in either condition
D. None of the above

Answer: A

12. The maximum risk in a short put is:

A. Unlimited
B. Equal to the price of the stock minus the premium received
C. Equal to the price of the stock plus the premium received
D. None of the above

Answer: B

13. Implied Volatility is:

A. Actual Volatility
B. Historical Volatility
C. Expected Volatility
D. Average Volatility

Answer: C

14. Co. A is currently trading for $116. Calculate by how much a Put Option with the
Strike Price 104 is OTM (Out of The Money)?

A. $0
B. $104
C. $116
D. $12

Answer: D

15. What is the advantage of American Options over European options?

A. American Options can be exercised anytime

B. American Options can only be exercised at the expiration date
C. American Options available in the US
D. American Options available outside of US as well

Answer: A

16. Co. B is trading for $179, which option is ITM (In the Money)?

A. Call 171
B. Call 186
C. Put 171
D. None of the above
Answer: A

17. Select the option that could profit from a rise in the underlying asset’s price:
A. Long Put
B. Short Call
C. Long stock
D. Long Call

Answer: D

18. The seller of a put option is betting that the market value of the stock will
decrease.
A. True
B. False

Answer: B

19. If the owner of a call option with a strike price of $65 finds the stock to be trading
for $79 at expiration, then the option:
A. Expires worthless
B. Is $14 ATM
C. Is $14 ITM
D. Is $14 OTM

Answer: C

20. What is the option buyer's total profit or loss per share if a call option is
purchased for a $7 premium, has a $55 exercise price, and the stock is valued at
$59 at expiration?
A. -$7
B. $4
C. -$3
D. $55

Answer: C

21. Which of the following option traders receive, rather than pay, a premium?
A. Long Call
B. Short Put
C. Long Put
D. None of the above

Answer: B

22. Which of the following is true for an investor that owns a share of stock and has
purchased a put option on the stock?
A. The investor profits when the stock decreases in value
B. Maximum loss is the price of the option premium
C. The investor is protected against upside potential
D. Increase in stock value goes to the seller of the put
Answer: A

23. Which combination of positions will tend to protect the owner from downside
risk?
A. Buy the stock and buy a call option
B. Sell the stock and buy a call option
C. Buy the stock and buy a put option
D. Sell the stock and buy a put option

Answer: C

24. What is the worst-case scenario for an investor who sold a call on the firm's stock
for a premium of $10 and a strike price of $100?
A. $90 per share profit
B. $10 per share profit
C. $0 per share profit
D. Unlimited loss

Answer: D

25. The value of a call option increases as the time to expiration increases because:
A. The exercise price continually decreases
B. Opportunity to surpass exercise price increases
C. Dividends accumulate while waiting to be paid
D. The option can be exercised more than once

Answer: B

26. Which of the following call options would command the higher premium in
September, 2002, other things equal?
A. October 2002 expiration, $45 strike price
B. December 2002 expiration, $40 strike price
C. March 2003 expiration, $45 strike price
D. June 2003 expiration, $40 strike price

Answer: D

27. An option that can be exercised only at the expiration date is called:

A. a European option
B. an American option
C. a call option
D. a put option

Answer: A
28. Which of the following investors would be happy to see the stock price rise
sharply?

A. An investor who owns a put option

B. An investor who owns the stock and has sold a call option
C. An investor who has sold a call option
D. None of the above

Answer: D

29. Suppose an investor sells a put option. What will happen if the stock price on
the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option
B. The seller will be obliged to buy stock from the owner of the option
C. The owner will not exercise his option
D. None of the above

Answer: B

30. Suppose an investor buys one share of stock and a put option on the
stock. What will be the payoff of his investment on the final exercise date if the
stock price is above the exercise price?

A. The value of two shares of stock

B. The value of one share of stock plus the exercise price
C. The exercise price
D. none of the above

Answer: D

31. The buyer of a call option has the choice to exercise, but the writer of the call
option has:

A. The choice to offset with a put option

B. The obligation to deliver the shares at exercise
C. The choice to deliver shares or take a cash payoff
D. The choice of exercising the call or not

Answer: B

32. Buying a call option and investing the present value of the exercise price in T-
bills (risk-free securities) is the same as:
A. Buying a call and a put
B. Buying a put and a share
C. Selling a put
D. Selling a call

Answer: B

33. Suppose an investor buys one share of stock and a put option on the stock and
simultaneously sells a call option on the stock with the same exercise price. What
will be the value of his investment on the final exercise date?

A. Above the exercise price if the stock price rises and below the exercise price if it
falls
B. Equal to the exercise price regardless of the stock price
C. Equal to zero regardless of the stock price
D. Below the exercise price if the stock price rises and above if it falls

Answer: B

34. Which options strategy would you use if you expect the price of an asset to rise
slightly but also wish to minimize the cost of a long call option?
A. Covered Call
B. Bull Call Spread
C. Bear Put Spread
D. None of the above

Answer: B

35. Which options strategy would you use if you expect the price of an asset to
decline slightly but also wish to minimize the cost of a long put option?
A. Married Put
B. Bull Call Spread
C. Bear Put Spread
D. None of the above

Answer: C

36. Why should you use leverage carefully?

A. Leverage magnifies only losses
B. Leverage magnifies only profits
C. Leverage magnifies both profits and losses
D. Leverage requires payment of interest

Answer: C

37. Which of the following is a risk in a long call options contract?

A. Counterparty risk
B. Liquidity risk
C. Market risk
D. All of the above

Answer: D

38. What is the most common strategy to reduce the risk from an options contract?
A. Taking an offsetting position to the original options contract
B. Taking leverage to invest
C. Exercising the option
D. None of the above

Answer: A

39. Which of the following is an important aspect of putting together a trading plan?
A. Risk Assessment
B. Identifying Objectives
C. Understanding the market
D. All of the above

Answer: D

40. Why is it important to stick to your trading plan?

A. Sticking to your trading plan helps you navigate through tough market
situations
B. Sticking to your trading plan protects you from taking irrational decisions that
may lead to losses
C. None of the above
D. All of the above

Answer: D

41. What is the benefit from taking an offsetting position in an options trade?
A. Limiting the potential losses
B. Reducing the risks from existing trade
C. Opportunity to correct any incorrect market predictions
D. All of the above

Answer: D

42. Market Risk is:

A. Risk from economic changes
B. Risk from political changes
C. Both A&B
D. None of the above

Answer: C

43. Liquidity Risk in options trading relates to which of the following metrics:
A. Volumes traded on the option
B. Price volatility of the option
C. Time to expiration of the option
D. None of the above

Answer: A

44. Which metric demonstrates the moneyness of an option?

A. Extrinsic Value
B. Time Value
C. Intrinsic Value
D. None of the above

Answer: C

45. Which metric demonstrates the time value of an option?

A. Extrinsic Value
B. Moneyness
C. Intrinsic Value
D. None of the above

Answer: A

46. Options delta measures the...

A. rate of change of an option's price to price changes of the underlying stock
B. rate of change of a stock's price to changes in the price of the option
C. rate of change of an option's price to changes in the implied volatility of the
underlying stock
D. rate of change of a stock's price to changes in its implied volatility

Answer: A

47. Options Theta measures the...

A. Rate of decay of an option's extrinsic value on a daily basis
B. Rate of decay of an option's intrinsic value on a daily basis
C. Rate of decay of an option's extrinsic value on a monthly basis
D. Rate of decay of an option's intrinsic value on a monthly basis

Answer: A

48. Options Vega measures the...

A. The expected volatility of the underlying stock
B. The implied volatility of an option
C. The price sensitivity of an option to changes in implied volatility
D. The price sensitivity of the underlying stock to changes in implied volatility

Answer: C

49. Options Gamma measures the...

A. The level of toxic exposure of an option
B. The rate of change of option's volatility to changes in the price of the underlying
stock
C. The rate of change of option's price to changes in the price of the underlying
stock
D. Tthe rate of change of options delta to changes in the price of the underlying
stock
Answer: D

50. Generally, when the price of a stock rises, which of the following holds true?
A. Theta of call options increases
B. Delta of call options increases
C. Delta of call options decreases
D. Theta of call options decreases

Answer: B

51. Generally, when the price of a stock decreases, which of the following holds
true?
A. Delta of short call options decreases
B. Delta of short call options increases
C. Delta of long call options decreases
D. Delta of call options is unaffected

Answer: A

52. Which of the following statement is true?

A. The extrinsic value of call options is inversely proportionate to its intrinsic value
B. The extrinsic value of call options is highest when it is in the money
C. The extrinsic value of call options is highest when it is out of the money
D. The extrinsic value of call options is highest when it is at the money

Answer: D

53. Assuming a stock is $10, its $9 strike price call options asking for $1.30 premium
consists of...
A. $1 extrinsic value and $0.30 intrinsic value
B. $1.30 worth of extrinsic value
C. $1 intrinsic value and $0.30 extrinsic value
D. $1.30 worth of intrinsic value

Answer: C

54. Assuming a stock is $10, its $9 strike price put options asking for $1 premium
consists of...
A. $0.7 extrinsic value and $0.3 intrinsic value
B. $1 worth of extrinsic value
C. $0.7 intrinsic value and $0.30 extrinsic value
D. $1 worth of intrinsic value

Answer: B

55. Which of the following positions is most likely to have a delta of zero?
A. Short at the money call option + long underlying stock
B. Short at the money call option + short underlying stock
C. long at the money call option + short underlying stock
D. long at the money call option + short at the money put option

Answer: D

56. Which of the following positions would you most likely put on if a stock is going to
go up?

A. Long underlying stock + short out of the money call options

B. Long call option + long put option
C. Long put option + short call option
D. Short underlying stock + long put option

Answer: A

57. Extrinsic Value is...

A. the part of the price of an option that you profit from when you buy an option
B. the part of the price of an option indicating its built in value
C. the part of the price of an option that reduces over time
D. the part of the price of an option that moves with the underlying stock

Answer: C

58. Which of the following positions are you most likely to put on if a stock is going to
go down?

A. Long stock + long out of the money call options

B. Long stock + long out of the money put options
C. Long at the money put options + short out of the money put options
D. Long out of the money put options + short at the money put options

Answer: C

59. Intrinsic value is...

A. The part of the price of an option that remains stagnant regardless of stock
movement
B. The part of the price of an option that you get as profit when you buy options
C. The part of the price of an option that decays over time
D. The part of the price of an option that indicates its built-in value

Answer: D

60. If you own a deep-in-the-money call option on non-dividend-paying stock, you

will MOST LIKELY NOT to ______.

A. Sell the option

B. Keep the option until later to see if the stock price will go up further
C. Exercise the option
D. None of the above

Answer: C

61. A call option with a strike price of $55 can be bought for $4. What will be your net
profit if you sell the call and the stock price is $52 when the call expires?
A. $4
B. $3
C. -$7
D. $7

Answer: A

62. Suppose you sell a call and buy one share of stock. What is your cash payoff
when the option expires? (Ignore the costs of the call and the share of stock).
A. Receive X if St ≤ X and receive St if St > X.
B. Receive St if St ≤ X and receive X if St > Xr
C. Receive St if St ≤ X and receive –(St –X) if St > X
D. Receive (St – X) if St ≤ X and receive X if St > X

Answer: B

63. Which of the following actions will not close a long position in a call option?

A. Buying a put with the same strike price, expiration, and underlying asset
B. Exercising the call
C. Allowing the call to expire
D. Selling a call with the same strike price, expiration, and underlying asset

Answer: C

64. Which of the following investment strategies has unlimited profit potential?

A. Writing a call
B. Bull spread
C. Covered Call
D. Long Call

Answer: C

65. Which of the following are the highest cost options?

A. Weekly
B. Monthly
C. Quarterly
D. All have same cost for the same underlying asset
Answer: C`

66. Which of the following options is the most appropriate to benefit from a short-
term news?

A. Weekly
B. Monthly
C. Quarterly
D. Any of the above

Answer: A

67. An investor looking to earn from writing options should choose which of the
following options?

A. Weekly
B. Monthly
C. Quarterly
D. Any of the above

Answer: C

68. Which factors affect the option premium amount?

A. Volatility of the underlying stock

B. Time to expiration
C. Moneyness of the option
D. All of the above

Answer: D

69. Which of the following is not a reason to trade options?

A. Hedging risks
B. Making money
C. Limiting losses
D. None of the above

Answer: D

70. Which option must an investor choose for ensuring minimum upfront payment,
given the stock price is $50 (All options have the same expiry)?

A. Long call 48
B. Long Call 50
C. Long Call 52
D. Any of the above

Answer: C
71. Why would an investor buy an out of the money call option?

A. It has the maximum time value

B. It has the minimum premium
C. It has the maximum intrinsic value
D. None of the above

Answer: B

72. What is the Theta for a long call option?

A. Negative
B. Positive
C. Zero
D. Has no relation

Answer: D

73. If John purchases a call option on Co. A stock at Strike price of $150 and sells a
call option on the same stock at strike price of $180 for a premium of $10, what
strategy has he employed?

A. Bear Put Spread

B. Long Call
C. Short Call
D. Bull Call Spread

Answer: D

74. Both Bull Call Spread and Bear Put Spread ensure what benefit to the investor?

A. Both maximize the profit

B. Both reduce the initial outlay of buying an option
C. Both A & B
D. None of the Above

Answer: B

75. If John purchases a put option on Co. A stock at Strike price of $150 and sells a
put option on the same stock at strike price of $120 for a premium of $10, what
strategy has he employed?

A. Bear Put Spread

B. Long Call
C. Short Call
D. Bull Call Spread

Answer: A
76. A Married Put option requires holding a stock and purchasing an out of the
money Put option on the same stock. What purpose does the strategy solve?

A. LImit the downside Risk from owning the stock

B. Provides unlimited profit potential
C. Both A&B
D. None of the above

Answer: C

77. Lisa has 100 shares of Amazon stock. She sells an options contract for 100
Amazon shares for a premium of $20. Which strategy has she constructed?

A. Bear Put Spread

B. Covered Call
C. Short Call
D. Married Put

Answer: B

78. Which of the following statements is incorrect about time decay?

A. Time decay accelerates the options nears its expiration

B. Time decay is the rate of change in value to an option's price as it nears
expiration
C. If the option is out-of-the-money (OTM), time decay increases at a faster rate.
D. None of the above

Answer: D

79. Which of the following statements is incorrect about implied volatility (IV)?

A. IV tells the direction of the price movements

B. IV refers to expected volatility
C. IV helps set option pricing/premiums
D. None of the above

Answer: A

80. Marylin is understanding options trading. She can buy AAPL shares currently
trading at $400 for $380 till the end of 6 months. She needs to make an upfront
payment of $40 for this trade. Which of the following is incorrect?

A. Strike Price is $400

B. Time to maturity is 6 months
C. Stock Price is $400
D. Option is in the money

Answer: A
81. Which of the following is false about moneyness of an option?

A. An in the money options has positive Moneyness

B. An in the money options has negative Moneyness
C. An out of the money options has negative Moneyness
D. An at the money options has no Moneyness

Answer: B

82. Which of the following is false about Time Decay?

A. Time-value decreases as an ITM option gets deeper (more) in the money

B. Time-value decreases as an OTM option gets deeper (more) out of the money
C. Time-value is at a maximum when an option is at the money
D. None of the above

Answer: D

83. A call option is selling for $5. The Strike Price is $120 and Stock Price is $90.
Which of the following is true?

A. Intrinsic Value of the call option buyer is $30

B. Intrinsic Value of the call option buyer is -$30
C. Maximum profit from selling this call option can be $120
D. None of the above

Answer: B

84. Which of the following is true about Implied Volatility (IV)?

A. High implied volatility results in options with higher premiums

B. Low implied volatility results in options with lower premiums
C. IV is highly sensitive to upcoming events and corrects later
D. All of the above

Answer: D

85. Which of the following is incorrect about Delta of an option?

A. Delta is positive for a Call option

B. Delta is negative for a Put option
C. Delta’s value ranges from 0 to 1
D. Rate of change of Delta is called Gamma

Answer: C

86. Which of the following is not an Options Greek?

A. Alpha
B. Gamma
C. Vega
D. Theta

Answer: A

87. Which of the following is a rationale for trading options?

A. Risk hedging
B. Higher ROI
C. A range of strategies to maximize profits and minimize losses
D. All of the above

Answer: D

88. Assume a stock is selling for $66.75 with options available at 60, 65, and 70
strike prices. The 65 call option price is at $4.50. What is the intrinsic value of the 65
call?

A. $1
B. $1.75
C. $1.25
D. $65

Answer: B

89. Assume a stock is selling for $66.75 with options available at 60, 65, and 70
strike prices. The 65 call option price is at $4.50. What is the extrinsic value of the 65
call?

A. $3.25
B. $1.75
C. $2.75
D. $65

Answer: C

90. Assume an investor writes a call option for 100 shares at a strike price of 30 for a
premium of 5.75. This is a naked option. What would the gain or loss be if the stock
closed at 26?

A. -$4.00
B. $1.75
C. $5.75
D. -$1.75

Answer: C

91. Assume an investor writes a call option for 100 shares at a strike price of 30 for a
premium of 5.75. This is a naked option. What would be the break-even stock price
(no gain/no loss price)?
A. $35.75
B. $24.25
C. $30.00
D. $25.00

Answer: A

92. Assume you purchase 100 shares of stock at $44 per share and wish to hedge
your position by writing a 100-share call option on your holdings. The option has a 40
strike price and a premium of 8.50. If the stock is selling at $38 at the time of
expiration, what will be the overall dollar gain or loss on this covered option play
(include any gain/loss on stock holding as well)?

A. $250
B. $850
C. $600
D. $3800

Answer: A

93. Assume you purchase 100 shares of stock at $44 per share and wish to hedge
your position by writing a 100-share call option on your holdings. The option has a 40
strike price and a premium of 8.50. If the stock is selling at $41 at the time of
expiration, what will be the overall dollar gain or loss on this covered option play
(include any gain/loss on stock holding as well)?

A. $250
B. $850
C. $450
D. $4100

Answer: C

94. Assume a 40 July put option is purchased for 6.50 on a stock selling at $35 per
share. If the stock ends up on expiration at 38.75, what will be the overall gain/loss
from holding the put option?

A. $1.25
B. -$1.25
C. $5.25
D. -$5.25

Answer: D

95. Assume you sell 100 shares of Bowie Corporation short at $72. You also buy a
70 call option for 5.25 to protect against the stock price going up. If the stock ends up
at $90, what will be your overall gain or loss?

A. $325
B. -$325
C. $525
D. -$525
Answer: B

96. Assume you sell 100 shares of Bowie Corporation short at $72. You also buy a
70 call option for 5.25 to protect against the stock price going up. If the stock ends up
at $90, what will be the intrinsic value from selling the option?

A. $2000
B. -$525
C. $1800
D. $200

Answer: A

97. Which of the following is true about option premium?

A. Option premium = Stock price - strike price

B. Option premium = Strike price - stock price
C. Option premium = Intrinsic value + Extrinsic value
D. Option premium = Intrinsic value - Extrinsic value

Answer: C

98. Which of the following statements is correct?

A. Time Value is dependent on moneyness of an option

B. Time Value is dependent on strike price of an option
C. Time Value is dependent on stock price of an option
D. None of the above

Answer: A

99. Which of the following statements is correct?

A. Long call options are preferred over long put options

B. American options are preferred over European options
C. Short call options are preferred short long put options
D. None of the above

Answer: B

100. If an option on an underlying asset is in-the-money, the premium for the option
will move dollar for dollar with the movement of the underlying asset’s price.

A. The statement is true

B. The statement is false
C. The variation in option premium will depend on other factors
D. There will be no variation in option premium

Answer: A