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Question 1 of 10
1. Question
Which of the following statements is/are true for Market if touched orders?
I. An MIT is placed below the market to initiate a short position and above the market to initiate a long position.
II. MITs tend to be filled better on average than stops because you are moving with the prevailing trend.
III. An MIT can be used to initiate a new short position above the market.
IV. An MIT to buy is placed under the market to exit a short position or enter a new long.
Correct
Market if touched
Also called MITs, market-if-touched orders are the mirror image of stops. MIT is placed above the market to initiate a short position and below the market to initiate a long position.
For example, say that you are long platinum in 1405, and you want to take profits at 1420. You could place a limit order to sell at 1420, but you cannot be assured that you will be filled if the price touches 1420. The market would have to trade above 1420 to have a reasonable assurance that you are out. An MIT at 1420 becomes a market order if 1420 is touched, which will ensure that you are out at the next prevailing price. MIT’s tend to be filled better on average than stops because you are moving with the prevailing trend. In a market that moves 1409.50, 1410, 1410.50, 1411, an MIT at 1410 would be filled at either 1410 or 1410.50. If the next tick after 1410 were 1409.50, you certainly could filled at 1409.50 (because the MIT became a market order), but it is more likely that a buy stop at 1410 would be filled at 1410.50 in this example. An MIT could also be used to initiate a new short position above the market. An MIT to buy is placed under the market to exit a short position or enter a new long. If the market is trading at 100, you might place an MIT to buy at 99, but you would place a stop to sell at 99. See the difference?
Incorrect
Market if touched
Also called MITs, market-if-touched orders are the mirror image of stops. MIT is placed above the market to initiate a short position and below the market to initiate a long position.
For example, say that you are long platinum in 1405, and you want to take profits at 1420. You could place a limit order to sell at 1420, but you cannot be assured that you will be filled if the price touches 1420. The market would have to trade above 1420 to have a reasonable assurance that you are out. An MIT at 1420 becomes a market order if 1420 is touched, which will ensure that you are out at the next prevailing price. MIT’s tend to be filled better on average than stops because you are moving with the prevailing trend. In a market that moves 1409.50, 1410, 1410.50, 1411, an MIT at 1410 would be filled at either 1410 or 1410.50. If the next tick after 1410 were 1409.50, you certainly could filled at 1409.50 (because the MIT became a market order), but it is more likely that a buy stop at 1410 would be filled at 1410.50 in this example. An MIT could also be used to initiate a new short position above the market. An MIT to buy is placed under the market to exit a short position or enter a new long. If the market is trading at 100, you might place an MIT to buy at 99, but you would place a stop to sell at 99. See the difference?
Question 2 of 10
2. Question
Which of the following statements is/are true for the value of delta in options trading?
I. Delta values range from 0 (for very deep out-of-the-money options) to 1.
II. At-the-money options have a delta value of 50% (or .5).
III. Calls have a negative delta, whereas puts have a positive delta.
IV. Delta value is 1 or 100% for options so deeply in the money that they move just like the underlying futures.
Correct
If you trade options, you possibly will also hear the term delta, which is what I’m referring to above. Delta values range from 0 (for very deep out-of-the money options) to 1 (or 100% for options so deeply in the money that they move just like the underlying futures). At-the-money options have a delta value of 50% (or .5). Calls have a positive delta, whereas puts have a negative delta. If, for example, a 400 copper call trading for 1250 points (or 12 1/2 ¢) has a delta of .6, a 1¢ (or 100-point) move in the copper price results in a move of 60 points in the value of the call to 1310.
Incorrect
If you trade options, you possibly will also hear the term delta, which is what I’m referring to above. Delta values range from 0 (for very deep out-of-the money options) to 1 (or 100% for options so deeply in the money that they move just like the underlying futures). At-the-money options have a delta value of 50% (or .5). Calls have a positive delta, whereas puts have a negative delta. If, for example, a 400 copper call trading for 1250 points (or 12 1/2 ¢) has a delta of .6, a 1¢ (or 100-point) move in the copper price results in a move of 60 points in the value of the call to 1310.
Question 3 of 10
3. Question
Which of the following comes under the financial futures category?
I. Interest Rates
II. Currencies
III. Repo rates
IV. Discounts
Correct
Financial futures
Financial futures can be broken down into three basics: interest rates, stock indices, and currencies.
Incorrect
Financial futures
Financial futures can be broken down into three basics: interest rates, stock indices, and currencies.
Question 4 of 10
4. Question
How buying options can protect futures?
I. Buying options to protect futures involves buying a put with long futures or buying a call with short futures.
II. Creating synthetic options because a put combined with a long future is similar to a put, and the call in conjunction with the short futures is similar to a call.
III. It adds flexibility to trading.
IV. Take an example that if you buy an at-the-money call option while simultaneously holding a short futures position (synthetic put), or you buy a put option while simultaneously
holding a long futures position (synthetic call) that the overall position will act just like a put or a call.
Correct
Buying options to protect futures
Buying options to protect futures involves buying a put with long futures or buying a call with short futures. This strategy is also known as creating synthetic options because a put combined with a long future is similar to a call, and the call in conjunction with the short futures is similar to a put. You can make a case that if you buy an at-the-money call option while simultaneously holding a short futures position (synthetic put), or you buy a put option while simultaneously holding a long futures position (synthetic call) that the overall position will act just like a put or a call (so why bother?). Because this can be a better strategy since it gives you added flexibility.
Incorrect
Buying options to protect futures
Buying options to protect futures involves buying a put with long futures or buying a call with short futures. This strategy is also known as creating synthetic options because a put combined with a long future is similar to a call, and the call in conjunction with the short futures is similar to a put. You can make a case that if you buy an at-the-money call option while simultaneously holding a short futures position (synthetic put), or you buy a put option while simultaneously holding a long futures position (synthetic call) that the overall position will act just like a put or a call (so why bother?). Because this can be a better strategy since it gives you added flexibility.
Question 5 of 10
5. Question
Which of the following statements is/are true regarding calendar spreads?
I. It takes the advantage of the tendency of nearby options to decay slower than distant options.
II. This strategy involves the sale of an option in one month and the simultaneous purchase of an option (usually, but not necessarily, the same strike price) in a later month.
III. One of the potential pitfalls is that the spread values of the underlying commodity do not change.
IV. The nearby month, which affects the short side of the spread, moves more dramatically because of higher open interest and greater speculative play.
Correct
Calendar spreads
Also known as time spreads, calendar spreads take advantage of the tendency of nearby options to decay faster than distant options. This strategy involves the sale of an option in one month and the simultaneous purchase of an option (usually, but not necessarily, the same strike price) in a later month. For example, you might sell a September 2500 cocoa call and buy a December 2500 cocoa call for a net debit. If the market remains fairly stable, you eventually gain the premium in the nearby to cheapen the ultimate cost of the distance, or there will
be a net gain on the entire position after some time passes. (You can, of course, liquidate both sides or just one side at any time.) One of the potential pitfalls in this strategy is that the spread values of the underlying commodity can change, perhaps favorably, but contrary to expectations as well. Many times, the nearby month, which affects the short side of the spread, moves more dramatically because of higher open interest and greater speculative play. The risk cannot always be predetermined to an exact level like the vertical spreads; however,
there is merit in this strategy if it is monitored and used correctly.
Incorrect
Calendar spreads
Also known as time spreads, calendar spreads take advantage of the tendency of nearby options to decay faster than distant options. This strategy involves the sale of an option in one month and the simultaneous purchase of an option (usually, but not necessarily, the same strike price) in a later month. For example, you might sell a September 2500 cocoa call and buy a December 2500 cocoa call for a net debit. If the market remains fairly stable, you eventually gain the premium in the nearby to cheapen the ultimate cost of the distance, or there will
be a net gain on the entire position after some time passes. (You can, of course, liquidate both sides or just one side at any time.) One of the potential pitfalls in this strategy is that the spread values of the underlying commodity can change, perhaps favorably, but contrary to expectations as well. Many times, the nearby month, which affects the short side of the spread, moves more dramatically because of higher open interest and greater speculative play. The risk cannot always be predetermined to an exact level like the vertical spreads; however,
there is merit in this strategy if it is monitored and used correctly.
Question 6 of 10
6. Question
To which of the following factors do the fundamentalists look into?
I. A country’s wealth
II. Inflation
III. Benchmark Indices
IV. Trade balances
Correct
Fundamentalists look at trade balances, a country’s wealth, budget deficit or surplus, interest rates, inflation, and political factors such as tax rates.
Incorrect
Fundamentalists look at trade balances, a country’s wealth, budget deficit or surplus, interest rates, inflation, and political factors such as tax rates.
Question 7 of 10
7. Question
Which of the following data is not analyzed by fundamentalists for meat production?
I. Corn and feed prices
II. Weather
III. The combination effect
IV. Consumer capability
Correct
A fundamentalist would analyze the following data:
• Seasonality: Although it does not happen every year, feeder cattle sales tend to peak in the fall, with the end of the grazing season. At the same time, calf/cow operators tend to sell off unproductive cows, which increases the total beef supply and depresses prices. Hog prices tend to be the highest in the summer months because the December-through-February time frame is traditionally a low-birth period. Also, the demand for pork tends to peak during the summer months.
• Corn and feed prices: The rule of thumb is that high feed prices result in liquidation and low feed prices result in accumulation. The other variable here is the market price of the finished product. If sale prices of cattle or hogs are high, then more money can be spent on feed. In 1996, when corn prices soared to a then all-time record high of more than $5 per bushel,
many cattle feeders found it more profitable to sell their stored corn and take their cattle to market (including breeding animals). Others could not afford the high feed costs, and this added to the liquidation. Prices of cattle spiked downward under the weight of the burdensome supply, but this turned out to be bullish for the longer term. This is pure economics. When
it is profitable to raise or feed animals, this is what producers do; when it isn’t, they don’t.
• Feeder costs: In cattle feeding, the feeder’s cost accounts for, in many cases, more than half of the total cost of production. Higher feeder costs lead to lower placements into feedlots.
• Weather: Tough winter weather can result in death loss and weight loss, which can reduce supply permanently or temporarily. At times, when the temperatures in the major feeding regions get extremely cold, cattle eat more and gain less. Animals that were to be ready for market at a certain date are “pushed back,” creating a temporary shortage, and there is a glut
• Consumer tastes: This can be approached in a macro sense and a micro sense. The per-capita consumption of beef or pork and how it changes over time affects price; this is a macro fundamental, and it has to do with dietary considerations and media news. On a more focused approach, hot summer days increase barbecue demand, and holidays increase the demand for hams.
• Exports and income levels: When a country achieves a higher level of income, the demand for red meat increases. Exports to Asia have become a much more important factor in recent years, and unexpected new export business can, at times, result in price spikes. China is a major soybean (and at times corn) importer due in large part to its large and expanding hog
industry.
• The substitution effect: Beef, pork, chicken, turkey, and fish are substitutable commodities to a major extent. For example, if the price of chicken plummets, sales increase, which takes away demand from the other meats.
Incorrect
A fundamentalist would analyze the following data:
• Seasonality: Although it does not happen every year, feeder cattle sales tend to peak in the fall, with the end of the grazing season. At the same time, calf/cow operators tend to sell off unproductive cows, which increases the total beef supply and depresses prices. Hog prices tend to be the highest in the summer months because the December-through-February time frame is traditionally a low-birth period. Also, the demand for pork tends to peak during the summer months.
• Corn and feed prices: The rule of thumb is that high feed prices result in liquidation and low feed prices result in accumulation. The other variable here is the market price of the finished product. If sale prices of cattle or hogs are high, then more money can be spent on feed. In 1996, when corn prices soared to a then all-time record high of more than $5 per bushel,
many cattle feeders found it more profitable to sell their stored corn and take their cattle to market (including breeding animals). Others could not afford the high feed costs, and this added to the liquidation. Prices of cattle spiked downward under the weight of the burdensome supply, but this turned out to be bullish for the longer term. This is pure economics. When
it is profitable to raise or feed animals, this is what producers do; when it isn’t, they don’t.
• Feeder costs: In cattle feeding, the feeder’s cost accounts for, in many cases, more than half of the total cost of production. Higher feeder costs lead to lower placements into feedlots.
• Weather: Tough winter weather can result in death loss and weight loss, which can reduce supply permanently or temporarily. At times, when the temperatures in the major feeding regions get extremely cold, cattle eat more and gain less. Animals that were to be ready for market at a certain date are “pushed back,” creating a temporary shortage, and there is a glut
• Consumer tastes: This can be approached in a macro sense and a micro sense. The per-capita consumption of beef or pork and how it changes over time affects price; this is a macro fundamental, and it has to do with dietary considerations and media news. On a more focused approach, hot summer days increase barbecue demand, and holidays increase the demand for hams.
• Exports and income levels: When a country achieves a higher level of income, the demand for red meat increases. Exports to Asia have become a much more important factor in recent years, and unexpected new export business can, at times, result in price spikes. China is a major soybean (and at times corn) importer due in large part to its large and expanding hog
industry.
• The substitution effect: Beef, pork, chicken, turkey, and fish are substitutable commodities to a major extent. For example, if the price of chicken plummets, sales increase, which takes away demand from the other meats.
Question 8 of 10
8. Question
What is/are the advantages of spread trading?
I. The ability to profit in both up or down situations.
II. The margin requirements for spreads are generally much larger than outright positions because the Exchange recognizes that.
III. It gives insulation from price shocks.
IV. Spreads tend to move slower, giving you more time to react.
Correct
The ability to profit in both up or down situations is one of the advantages of spread trading. Also, the margin requirements for spreads are generally much smaller than outright positions because the Exchange recognizes that, in most cases, spreads are less risky. If you are long May corn and short September corn, and the president declares a grain embargo, odds are that both months will be down sharply. In other words, you are somewhat insulated from dramatic news with the resulting price shocks when spread trading. In addition, spreads tend to
move slower, giving you more time to react, and many traders believe spreads are more predictable.
Incorrect
The ability to profit in both up or down situations is one of the advantages of spread trading. Also, the margin requirements for spreads are generally much smaller than outright positions because the Exchange recognizes that, in most cases, spreads are less risky. If you are long May corn and short September corn, and the president declares a grain embargo, odds are that both months will be down sharply. In other words, you are somewhat insulated from dramatic news with the resulting price shocks when spread trading. In addition, spreads tend to
move slower, giving you more time to react, and many traders believe spreads are more predictable.
Question 9 of 10
9. Question
Which of the following statements is/are true regarding limited-risk spreads?
I. Limited-risk spreads include carrying charge spreads.
II. Carrying charges are the costs to hold a commodity from one month to the next and include transport costs and interest.
III. Limited-risk carrying charge spreads can be found only in non-storable commodities.
IV. There is no limit to how spreads can vary in either direction for perishable commodities such as live cattle.
Correct
Limited-risk spreads include carrying charge spreads. Carrying charges are the costs to hold a commodity from one month to the next and include storage costs and interest. For example, if it costs 3¢ per month to hold wheat, and the July/September wheat spread is trading at 8¢ premium to the September, by definition the risk on this one, is low. Unless interest rates rise dramatically, the likelihood that September would rise much more above July is minimal. However, if a bull market develops in wheat due to limited nearby supplies, there is no limit as to how far July could rise above September. These are spreads to watch for. Limited-risk carrying charge spreads can be found only in storable commodities. On the other hand, there is no limit to how spreads can vary in either direction for perishable commodities such as live cattle.
Incorrect
Limited-risk spreads include carrying charge spreads. Carrying charges are the costs to hold a commodity from one month to the next and include storage costs and interest. For example, if it costs 3¢ per month to hold wheat, and the July/September wheat spread is trading at 8¢ premium to the September, by definition the risk on this one, is low. Unless interest rates rise dramatically, the likelihood that September would rise much more above July is minimal. However, if a bull market develops in wheat due to limited nearby supplies, there is no limit as to how far July could rise above September. These are spreads to watch for. Limited-risk carrying charge spreads can be found only in storable commodities. On the other hand, there is no limit to how spreads can vary in either direction for perishable commodities such as live cattle.
Question 10 of 10
10. Question
How can you tell if a market is in a blow-off top in the bull market?
I. Close to the end of the move, during the top formation, the market surges lower, with only shallow corrections.
II. Compared to the norm, volumes are low.
III. Relative Strength Index [RSI], run up to extremely high (overbought) readings, but although these readings appear to be in unsustainable territory, the market continues moving higher than anyone believed possible.
IV. We can hear outlandish price predictions in the mainstream media, along with talk of shortages in this or that.
Correct
How can you tell if a market is in a blow-off top?
Close to the end of the move, during the top formation, the market surges higher, with only shallow corrections. Compared to the norm, volumes are huge. Technical indicators, such as the Relative Strength Index [RSI], run up to extremely high (overbought) readings, but although these readings appear to be in unsustainable territory, the market continues moving higher than anyone believed possible. Then you’ll hear outlandish price predictions in the mainstream media, along with talk of shortages in this or that. The talk will be that the world is going to run out of X commodity. In many cases, the last 48 hours of a major move can be the most feverish and therefore the most lucrative for the bulls. This final surge that forms the actual blow-off is the most painful for the bears. Their capitulation (short covering) creates the final high prices. Nobody I know of is able to pick the exact top in a situation such as this.
However, in markets that show these signs, if you have been fortunate enough to be on for some of the ride, it’s time to be vigilant because the end is near. The top price will come when nobody is looking and generally when the news is as bullish as it can get.
Incorrect
How can you tell if a market is in a blow-off top?
Close to the end of the move, during the top formation, the market surges higher, with only shallow corrections. Compared to the norm, volumes are huge. Technical indicators, such as the Relative Strength Index [RSI], run up to extremely high (overbought) readings, but although these readings appear to be in unsustainable territory, the market continues moving higher than anyone believed possible. Then you’ll hear outlandish price predictions in the mainstream media, along with talk of shortages in this or that. The talk will be that the world is going to run out of X commodity. In many cases, the last 48 hours of a major move can be the most feverish and therefore the most lucrative for the bulls. This final surge that forms the actual blow-off is the most painful for the bears. Their capitulation (short covering) creates the final high prices. Nobody I know of is able to pick the exact top in a situation such as this.
However, in markets that show these signs, if you have been fortunate enough to be on for some of the ride, it’s time to be vigilant because the end is near. The top price will come when nobody is looking and generally when the news is as bullish as it can get.
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