Let’s try something different this time. Here’s a quiz for readers who have just begun, or are thinking about, trading options. Take your time because not all questions are easy.
1. You sold a call option, hoping it would expire worthless. However, the stock moved higher and the call option is now in the money by five points. You are anxious to eliminate this position from your portfolio. Which of these choices is possible:
a. Exercise your call option
b. Buy the identical call option
c. Tell your broker to notify the option owner to exercise the option
d. None of this is possible
2. You own 3 XYX Jul 80 calls
You sold 3 XYX Jul 80 puts
Which of these positions is equivalent (same risk and reward) as the above?
a. Long 300 shares of XYX
b. Short 300 shares of XYX
c. Neither. A stock position is never equivalent to an option position
3. You own five European style index options. The underlying asset is SPX, the Standard & Poors 500 Index. Which of the following is true?
a. You may exercise the options any time before they expire
b. You may sell the options any time before they expire
c. The options expire at the close of business on the 3rd Friday of the month
d. If you exercise a call option, you will be the proud owner of a basket consisting of 500 different stocks.
4. When you want to buy a put option now, which of these prices is most important:
a. Yesterday’s closing price
b. The last price at which a trade occurred
c. The ask price
d. The bid price
5. When you buy 10 call options to open a new position, what happens to the open interest?
a. It increases by 10
b. It decreases by 10
c. It depends on the position of the person who sells the options
d. None of the above
ANSWERS ARE NOW AVAILABLE, click here.
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- Entering an Order to Buy or Sell Options Investor Series, Part I