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Question 1 of 10
1. Question
Which of the following statements is true regarding call and put?
Correct
Call and put
A call option represents the right to purchase a specified commodity or asset at a specified price within a specified time frame. A trader who purchases a call is said to establish a long market position. A trader who sells a call is said to establish a short market position. A put option represents the right to sell a specified commodity or asset at a specified price within a specified time frame. A trader who buys a put is said to establish a short position with respect to the underlying asset. A trader who sells a put is said to establish a long position with respect to it. This is because a “long position” is one that wants the underlying asset’s price to rise, while a short position wants it to decrease.Incorrect
Call and put
A call option represents the right to purchase a specified commodity or asset at a specified price within a specified time frame. A trader who purchases a call is said to establish a long market position. A trader who sells a call is said to establish a short market position. A put option represents the right to sell a specified commodity or asset at a specified price within a specified time frame. A trader who buys a put is said to establish a short position with respect to the underlying asset. A trader who sells a put is said to establish a long position with respect to it. This is because a “long position” is one that wants the underlying asset’s price to rise, while a short position wants it to decrease. -
Question 2 of 10
2. Question
Which of the following statements is false regarding call and put?
Correct
Call and put
A call option represents the right to purchase a specified commodity or asset at a specified price within a specified time frame. A trader who purchases a call is said to establish a long market position. A trader who sells a call is said to establish a short market position. A put option represents the right to sell a specified commodity or asset at a specified price within a specified time frame. A trader who buys a put is said to establish a short position with respect to the underlying asset. A trader who sells a put is said to establish a long position with respect to it. This is because a “long position” is one that wants the underlying asset’s price to rise, while a short position wants it to decrease.Incorrect
Call and put
A call option represents the right to purchase a specified commodity or asset at a specified price within a specified time frame. A trader who purchases a call is said to establish a long market position. A trader who sells a call is said to establish a short market position. A put option represents the right to sell a specified commodity or asset at a specified price within a specified time frame. A trader who buys a put is said to establish a short position with respect to the underlying asset. A trader who sells a put is said to establish a long position with respect to it. This is because a “long position” is one that wants the underlying asset’s price to rise, while a short position wants it to decrease. -
Question 3 of 10
3. Question
Regarding conversion, which of the following statements is true?
Correct
Conversion
The combination of long and short option positions, as well as similar combinations of both options and futures positions, creates what are known as synthetic positions. Conversion is said to occur when market makers identify a price discrepancy and take an opposite position, which, in turn, causes the pricing to revert to equality. Traders will sell an overpriced call and buy (take a long position) on the futures and the put. A reverse conversion is said to occur when traders buy an underpriced call and sell the futures and the put.Incorrect
Conversion
The combination of long and short option positions, as well as similar combinations of both options and futures positions, creates what are known as synthetic positions. Conversion is said to occur when market makers identify a price discrepancy and take an opposite position, which, in turn, causes the pricing to revert to equality. Traders will sell an overpriced call and buy (take a long position) on the futures and the put. A reverse conversion is said to occur when traders buy an underpriced call and sell the futures and the put. -
Question 4 of 10
4. Question
From the statements below regarding Delta, which one seems to be the most appropriate to you?
Correct
Delta
Delta, also known as the hedge ratio, is a measure of the volatility in the price of an option that is expressed as a value between 0 and 1.0 for calls, and as a value between 0 and –1.0 for puts. In effect, it is the correlation. The measure is derived by comparing the expected change in the price of an option to the change in price of the underlying commodity. Delta can be useful to a trader when he or she is determining the number of option contracts required to hedge a position. For example, a delta with an absolute value of 1.0 indicates a 1:1 match between the number of options required relative to the underlying security. If a trader seeks to hedge a 10,000 share long position and an option contract represents 1,000 shares, the delta would suggest that 10 contracts are required. If the delta was 0.75, on the other hand, 13 contracts would be required.Incorrect
Delta
Delta, also known as the hedge ratio, is a measure of the volatility in the price of an option that is expressed as a value between 0 and 1.0 for calls, and as a value between 0 and –1.0 for puts. In effect, it is the correlation. The measure is derived by comparing the expected change in the price of an option to the change in price of the underlying commodity. Delta can be useful to a trader when he or she is determining the number of option contracts required to hedge a position. For example, a delta with an absolute value of 1.0 indicates a 1:1 match between the number of options required relative to the underlying security. If a trader seeks to hedge a 10,000 share long position and an option contract represents 1,000 shares, the delta would suggest that 10 contracts are required. If the delta was 0.75, on the other hand, 13 contracts would be required. -
Question 5 of 10
5. Question
Which of the following statements is true regarding exercising?
Correct
Exercising
Option contracts give the holder the right but not the obligation to buy or sell an underlying asset at a specified price within a specified time period. Options are exercised when their value is in the money, which occurs when the price of the underlying asset is greater than the strike price of a call option or less than the strike price of a put option.Incorrect
Exercising
Option contracts give the holder the right but not the obligation to buy or sell an underlying asset at a specified price within a specified time period. Options are exercised when their value is in the money, which occurs when the price of the underlying asset is greater than the strike price of a call option or less than the strike price of a put option. -
Question 6 of 10
6. Question
Which of the following statements is false regarding Grantor and writer?
Correct
Grantor and writer
Grantor and writer are two synonymous terms for an individual or entity that creates and issues for sale (in exchange for a premium) an option contract. This individual or entity is obligated to fulfill the terms of the contract if an option is exercised. A grantor or writer of a put option is obligated to purchase the underlying commodity, while a grantor or writer of a call option is obligated to sell the underlying commodity.Incorrect
Grantor and writer
Grantor and writer are two synonymous terms for an individual or entity that creates and issues for sale (in exchange for a premium) an option contract. This individual or entity is obligated to fulfill the terms of the contract if an option is exercised. A grantor or writer of a put option is obligated to purchase the underlying commodity, while a grantor or writer of a call option is obligated to sell the underlying commodity. -
Question 7 of 10
7. Question
Which of the following statements is false regarding Intrinsic value?
Correct
Intrinsic value
As it relates to options pricing, intrinsic value is the difference between the strike price of an option and the current price of the underlying security. This is commonly referred to as the “in the money” amount. For example, if the strike price of a call option is $25 and the current price of the security is $30, the option is considered to be in the money by $5, which is its intrinsic value. Likewise, if the strike price of a put option is $25 and the price of the security is $15, the put has an intrinsic value of $10. Note that negative values are typically expressed as zero. For example, a put option with a strike price of $25 and a security price of $30 has zero intrinsic value.Incorrect
Intrinsic value
As it relates to options pricing, intrinsic value is the difference between the strike price of an option and the current price of the underlying security. This is commonly referred to as the “in the money” amount. For example, if the strike price of a call option is $25 and the current price of the security is $30, the option is considered to be in the money by $5, which is its intrinsic value. Likewise, if the strike price of a put option is $25 and the price of the security is $15, the put has an intrinsic value of $10. Note that negative values are typically expressed as zero. For example, a put option with a strike price of $25 and a security price of $30 has zero intrinsic value. -
Question 8 of 10
8. Question
Regarding time value, which of the following statements is true?
Correct
Time value
Broadly defined, intrinsic value is the difference between the strike price of an option and the price of the underlying asset. At expiration, an option is worth only its intrinsic value. For example, if a security is priced at $25 on an option expiration day and the strike price of the option is $20, the value of the option is $5. This is because paying $5 to purchase at $20 is the same as purchasing at $25 at market.Incorrect
Time value
Broadly defined, intrinsic value is the difference between the strike price of an option and the price of the underlying asset. At expiration, an option is worth only its intrinsic value. For example, if a security is priced at $25 on an option expiration day and the strike price of the option is $20, the value of the option is $5. This is because paying $5 to purchase at $20 is the same as purchasing at $25 at market. -
Question 9 of 10
9. Question
From the statements below regarding time value, which one seems to be the most appropriate to you?
Correct
Time value
Broadly defined, intrinsic value is the difference between the strike price of an option and the price of the underlying asset. At expiration, an option is worth only its intrinsic value. For example, if a security is priced at $25 on an option expiration day and the strike price of the option is $20, the value of the option is $5. This is because paying $5 to purchase at $20 is the same as purchasing at $25 at market. However, during the life of the option prior to expiration, the element of time will impact the value of the option. For example, if there is a long period of time remaining until expiry, an option will typically command a premium because there is greater opportunity (i.e. time) for a favorable outcome. In this case, the option value will be greater than the intrinsic value. A second component related to time value is the volatility of the underlying commodity. Large price fluctuations over the life of an option period also result in pricing premiums, as the condition results in both opportunity for the holder of the option and compensation for the writer of the option.Incorrect
Time value
Broadly defined, intrinsic value is the difference between the strike price of an option and the price of the underlying asset. At expiration, an option is worth only its intrinsic value. For example, if a security is priced at $25 on an option expiration day and the strike price of the option is $20, the value of the option is $5. This is because paying $5 to purchase at $20 is the same as purchasing at $25 at market. However, during the life of the option prior to expiration, the element of time will impact the value of the option. For example, if there is a long period of time remaining until expiry, an option will typically command a premium because there is greater opportunity (i.e. time) for a favorable outcome. In this case, the option value will be greater than the intrinsic value. A second component related to time value is the volatility of the underlying commodity. Large price fluctuations over the life of an option period also result in pricing premiums, as the condition results in both opportunity for the holder of the option and compensation for the writer of the option. -
Question 10 of 10
10. Question
Which of the following statements is true regarding spread, straddle, and strangle?
Correct
Spread, straddle, and strangle
Spreads, straddles, and strangles are trading strategies designed to minimize risk due to adverse changes in the prices of underlying commodities. Each involves a combination of long and short positions that use either futures contracts and options (for spreads) or options alone (for straddles and strangles). Spread example: A trader seeking to hedge a long position might purchase both a related futures contract and a put. If prices of the underlying commodities fall, the put can be exercised. If prices rise, gains are available from the futures. If prices remain relatively unchanged, the loss to the trader is limited to the premium paid for the put. A straddle is a similar strategy involving the purchase of either two put options or two call options, each having the same expiration date and strike price.Incorrect
Spread, straddle, and strangle
Spreads, straddles, and strangles are trading strategies designed to minimize risk due to adverse changes in the prices of underlying commodities. Each involves a combination of long and short positions that use either futures contracts and options (for spreads) or options alone (for straddles and strangles). Spread example: A trader seeking to hedge a long position might purchase both a related futures contract and a put. If prices of the underlying commodities fall, the put can be exercised. If prices rise, gains are available from the futures. If prices remain relatively unchanged, the loss to the trader is limited to the premium paid for the put. A straddle is a similar strategy involving the purchase of either two put options or two call options, each having the same expiration date and strike price.