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Quizzes > Quizzes for Business > Finance

Take the Basic Options Trading Knowledge Test

Test Your Options Trading Fundamentals Today

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art depicting a trivia quiz on basic options trading knowledge

Use this basic options trading quiz to practice calls, puts, pricing, and risk in 15 quick questions. You'll get instant feedback to spot gaps before you trade, and you can also try the Stock & Options quiz or the Financial Trading quiz for more practice.

What right does a call option give its holder?
Right to sell the underlying asset at the strike price.
Obligation to buy the underlying asset at the strike price.
Obligation to sell the underlying asset at the strike price.
Right to buy the underlying asset at the strike price.
A call option grants the holder the right, but not the obligation, to buy the underlying asset at the specified strike price. Sellers are obligated only if the option is exercised. This distinguishes calls from puts.
What right does a put option grant its holder?
Right to buy the underlying asset at the strike price.
Obligation to sell the underlying asset at the strike price.
Right to sell the underlying asset at the strike price.
Obligation to buy the underlying asset at the strike price.
A put option gives the holder the right, but not the obligation, to sell the underlying at the strike price. This allows the holder to benefit if the underlying price falls. Sellers of puts must buy if exercised.
What does the strike price of an option represent?
The price at which the underlying can be bought or sold if exercised.
The time remaining until expiration.
The premium paid for the option.
The current market price of the underlying asset.
The strike price is the fixed price at which the option holder can buy (call) or sell (put) the underlying asset. It does not change with market price. It is a key determinant of intrinsic value.
What is an option premium?
The expiration date of the option.
The fee paid by the seller to the buyer of the option.
The difference between strike price and market price.
The fee paid by the buyer to the seller of the option.
The premium is the price paid by the option buyer to the seller for the rights conveyed. It consists of intrinsic and time value. Sellers receive the premium upfront.
How is the intrinsic value of an in-the-money call option calculated?
Strike price minus underlying price.
Underlying price minus strike price.
Implied volatility multiplied by time to expiration.
Premium minus time value.
Intrinsic value of a call is the amount by which the underlying price exceeds the strike price (Sâˆ'K). It cannot be negative and excludes time value. It measures immediate exercise worth.
A trader buys one call option with a strike price of $50 for a premium of $3. At expiration the underlying is at $60. What is the profit per share?
$3
$10
-$3
$7
Profit equals intrinsic value minus premium: ($60âˆ'$50)âˆ'$3 = $7. The premium cost reduces gross payoff. This net profit reflects the trade outcome.
When you sell a put option, you are obligated to do what if the option is exercised against you?
Purchase additional options.
Buy shares at the strike price.
Sell shares at the strike price.
Deliver cash equal to the premium.
Selling a put obligates you to buy the underlying at the strike price if exercised. You receive the premium but take downside risk. Buyers of puts force sellers to purchase the asset.
How does an increase in implied volatility generally affect the price of both calls and puts?
It increases the option premiums.
It only affects call options.
It decreases the option premiums.
It has no effect on premiums.
Higher implied volatility raises the expected range of the underlying's future price, increasing both call and put premiums. This is captured by vega. All else equal, more uncertainty increases option value.
If a trader expects the underlying asset price to remain relatively stable, which of the following option strategies might profit?
Long call
Long straddle
Short straddle
Long put
A short straddle sells both call and put at the same strike and benefits from low volatility and time decay if the price stays near the strike. Long straddles require large moves.
Which Greek measures an option's sensitivity to a small change in the price of the underlying asset?
Vega
Rho
Delta
Theta
Delta measures the rate of change of an option's price for a $1 change in the underlying. Theta measures time decay, vega measures volatility sensitivity, and rho measures interest rate sensitivity.
What happens to the time value component of an option as expiration approaches, assuming no change in other factors?
It decays and accelerates near expiration.
It remains constant until expiration.
It turns negative.
It increases gradually.
Time value decays over the life of the option and accelerates as expiration nears, known as theta. This reflects diminishing chance of favorable moves. Near expiry, decay is fastest.
Which strategy involves buying a call at a lower strike and selling a call at a higher strike with the same expiration?
Straddle
Strangle
Bear put spread
Bull call spread
A bull call spread buys a call at a lower strike and sells a call at a higher strike. It limits upside but also reduces premium outlay. Both legs share the same expiration.
A long put option position becomes profitable if the underlying asset price does what relative to the strike price?
Falls below the strike price.
Remains constant.
Rises above the strike price.
Equals the strike price.
A long put yields intrinsic value when the underlying price is below the strike, since you can sell above market. If price is above strike, it expires worthless.
If implied volatility increases after establishing a long straddle, what generally happens to the straddle's value?
It stays the same.
It increases.
Only the call leg gains.
It decreases.
A long straddle is long vega, so an increase in implied volatility raises both call and put values. The straddle's total value increases even without a price move.
What risk management technique involves buying a put option on an asset you already own to limit downside risk?
Collar
Covered call
Long straddle
Protective put
A protective put is buying a put on an asset you own, which caps downside at the strike while retaining upside. This functions like insurance against a price drop.
Which of the following positions represents a call ratio backspread?
Sell 1 50-strike call and buy 2 55-strike calls.
Buy 2 50-strike calls and sell 1 55-strike call.
Buy 1 60-strike call and sell 2 55-strike calls.
Sell 2 60-strike calls and buy 1 55-strike call.
A call ratio backspread sells fewer lower-strike calls and buys more higher-strike calls (here sell 1 at 50, buy 2 at 55). It profits from large upside moves. Ratio backspreads are net long options.
Between a 10-day ATM call option and a 60-day ATM call option (same strike and underlying), which will experience a larger absolute daily time decay (theta)?
Both will have equal theta.
The 60-day ATM call.
Theta depends only on volatility, not time.
The 10-day ATM call.
Short-dated ATM options have higher absolute theta in the last days before expiration. The 10-day call will lose time value faster than the 60-day call per day.
A long straddle position is most sensitive to which combination of Greeks?
Negative gamma and positive theta.
Positive gamma and positive vega.
Negative gamma and negative vega.
Positive delta and negative vega.
A long straddle (long call + long put) is long gamma and long vega, profiting from large moves or higher volatility. Gamma is sensitivity to price changes, vega to volatility.
An investor buys a 100-strike call for $5 and a 100-strike put for $4, creating a straddle. If the underlying closes at $115 at expiration, what is the investor's profit per share?
$5
$9
$6
$15
The call is worth $15 at expiration, the put expires worthless. Total payoff is $15 minus $9 of premiums = $6. This reflects the net gain per share.
Which of the following option combinations best describes an iron butterfly?
Sell 1 ATM call and 1 ATM put; buy 1 OTM call and 1 OTM put.
Buy 1 ITM call, buy 1 OTM put, sell 2 ATM options.
Sell 1 ITM call, buy 2 ATM calls, and sell 1 OTM call.
Buy 1 ATM call and sell 2 OTM calls.
An iron butterfly consists of selling an ATM straddle and buying wings (OTM call and OTM put) to limit risk. It has limited profit at the strike and limited risk outside the wings.
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Learning Outcomes

  1. Identify key terms and concepts in options trading
  2. Apply strategies for buying and selling calls and puts
  3. Analyse how market conditions affect option pricing
  4. Calculate potential profit and loss for options positions
  5. Demonstrate risk management techniques specific to options
  6. Evaluate the impact of time decay and volatility on premiums

Cheat Sheet

  1. Understand the Black-Scholes Formula - This groundbreaking model calculates the theoretical price of European call and put options by blending factors like current stock price, strike level, time until expiration, risk-free rate, and market volatility. Grasping it gives you the mathematical edge to value options like a seasoned trader. Dive into the Black-Scholes basics
  2. Grasp Intrinsic and Time Value - An option's premium splits into intrinsic value (the cash-in-your-pocket difference between asset price and strike price) and time value (the exciting potential before expiration). Understanding both parts helps you see where the real opportunity lies. Unlock intrinsic vs time value magic
  3. Learn Option Greeks - Meet the Greek gods of options: Delta shows price sensitivity, Gamma tracks Delta's rate of change, Theta measures time decay, Vega gauges volatility impact, and Rho watches interest rate effects. Together, they form your ultimate options toolkit. Master the Greeks cheat sheet
  4. Explore Common Trading Strategies - Dive into straddles, spreads, butterflies, and more to learn how they balance risk and reward. Each setup tells a story and offers unique ways to profit whether the market soars, sinks, or stays flat. Explore popular options strategies
  5. Analyze Market Conditions - Volatility spikes, interest-rate shifts, and trend reversals all leave their mark on option prices. Spotting these signals helps you choose the right strategy at the perfect moment. Gauge market condition impacts
  6. Calculate Profit and Loss - Use payoff diagrams like treasure maps to visualize gains and losses at expiration. Running the numbers before you trade strengthens your risk management and boosts your confidence. Crunch profit and loss outcomes
  7. Understand Time Decay (Theta) - Time is the silent killer in options, and its name is Theta! Grasping how options lose value each day helps you pick expiration dates and manage positions before value slips away. Tame time decay (Theta) effects
  8. Evaluate Volatility's Impact - Higher volatility generally bumps up option premiums because bigger price swings mean bigger profit chances. Understanding this link lets you choose strategies that shine when markets get choppy. Decipher volatility's secret code
  9. Practice Risk Management - Protect your portfolio with stop-loss orders, position sizing, and diversification. Building your safety net turns thrilling trades into calculated adventures. Build your risk management toolkit
  10. Stay Informed - Keep one eye on financial news, earnings reports, and market analysis to surf the big waves and avoid hidden reefs. Timely insights are your secret weapon for smarter option plays. Stay ahead with market insights
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