Basic Options Final Exam

Front 1

What is the correct definition for an option?

Back 1

A CONTRACT that gives the purchaser the RIGHT to buy OR sell stock at a SET PRICE on or before a SET DATE

Front 2

Which item below DOES NOT make up part of an Option Contract?
-Strike Price
-Expiration Date
-Premium
-Open interest

Back 2

OPEN INTEREST

Front 3

After you purchase an option contract, what 3 options do you have?

Back 3

1. EXERCISE IT

2. Sell it

3. Let it Expire

Front 4

When do options technically "expire"?

When can you only trade options?

Back 4

SATURDAY

You can only trade options UP UNTIL the market closes on the 3rd Friday of the month

Front 5

The option premium is composed of what 2 parts or "values"?

Back 5

TIME VALUE

INTRINSIC VALUE

Front 6

Which area is considered to be the OVERBOUGHT range in the Market Forecast?

Back 6

80-100

Front 7

(T/F)
In the Market Forecast, the Momentum (Red) line can be a leading indicator to the Intermediate (green) line

Back 7

TRUE

Front 8

X If all 3 lines in the Market Forecast are in the UPPER REVERSAL ZONE at the same time, this can indicate that what may shortly appear?

Back 8

BEARISH TREND

Front 9

X (T/F)
As a "Contrarians Indicator" if the volatility Index is rising, fear is falling

Back 9

FALSE

Front 10

(T/F)
A Trader that applies the principle of trading with the trend when all 3 trends (Market, industry and stock) are moving in the same direction will more than likely have a higher success rate than a trader who does not

Back 10

TRUE

Front 11

If a trader is applying the principle of "trading with the trend" what trend(s) does he want to look at?

Back 11

MARKET

INDUSTRY

STOCK

Front 12

Because Technical Analysis for options trading is similar to stock trading, what items are important to consider?

Back 12

MACD & Stochastics

Support and Resistance

Volumes

Front 13

A MORE aggressive options trader would buy MORE or LESS time?

Back 13

LESS TIME

Front 14

A MORE aggressive options trader would buy less what?

Back 14

TIME

Front 15

(T/F) Out-of-the-money contracts are considered to be "aggressive" because to profit from them the stock must move significantly

Back 15

TRUE

Front 16

Why are Out-Of-the-Money contracts considered to be "aggressive"?

Back 16

Because to profit from them, the stock MUST MOVE significantly

Front 17

If an options trade is NOT moving as you anticipated, you should do what?

Back 17

Take a loss, get out, and protect your capital!

Front 18

Option trades are ____-term trades

Back 18

SHORT

Front 19

How often should you monitor your options trade?

Back 19

DAILY

Front 20

Out of the 8 steps to buying puts, what is step 1?

Back 20

Decide if you are bullish or bearish

Front 21

(T/F) Although conservative investors typically buy in-the-money call contracts, they will typically buy out-of-the-money puts

Back 21

False

Front 22

If you purchase a PUT contract, what do you have?

Back 22

A RIGHT to Sell shares of stock

Front 23

If you purchase a PUT contract, you have
a ______ to ______ shares of stock

Back 23

A RIGHT to SELL

Front 24

(T/F) As you look for call strategy opportunities you will seek volatile stocks, so for put strategies, you should see after non-volatile stocks

Back 24

FALSE

Front 25

In Step Eight, Monitoring Your Trade, what are parts of the step?
3

Back 25

1. Sell 1/2 your contracts if you double your money
2. Sell if you have achieved your target price
3. Check the option on a daily basis

Front 26

(T/F) The Seller in a Covered Call transaction has an obligation to buy shares of stock from the other party

Back 26

FALSE

Front 27

Getting "Called Out" means what?

Back 27

You LOSE your shares

Front 28

X If today is March 1st, and you have a choice of selling one of the two listed months, which one may have the HIGHER risk of getting called out?
A. March
B. April

Back 28

APRIL

Front 29

X When entering the initial option trade for the covered call, you will:
-Buy to Open
-Buy to Close
-Sell to Open
-Sell to Close

Back 29

NOT SELL TO CLOSE

Front 30

If you do not own shares of a stock, and you SELL a Call, it is considered what?

Back 30

NAKED

Front 31

What is considered a "Naked Call"?

Back 31

If you DO NOT OWN Shares of stock and you SELL a CALL

Front 32

(T/F) If the buyer in an option contract has the RIGHT, the Seller must ALWAYS have the OBLIGATION

Back 32

TRUE

Front 33

X What does an in-the-money contract mean for the option?

Back 33

It has VALUE if it is exercised AT the Strike Price on Expiration

Front 34

An In-the-money contract means that:
-You have made money
-The Option has value if it is exercised at the strike price on expiration
-it does not have intrinsic value
-it must be a call contract

Back 34

The Option HAS VALUE IF it is EXERCISED at the Strike Price on Expiration

Front 35

(T/F) Intrinsic value changes only when the stock's price changes.

Back 35

TRUE

Front 36

When is the ONLY time Intrinsic Value changes?

Back 36

When the stocks's price changes

Front 37

x If a Company's earnings were about to be announced and the Implied Volatility was high, you would expect that the option premiums might be:
-Higher than normal
-Lower than normal
-Not affected

Back 37

HIGHER than NORMAL

Front 38

X If you purchase a $25 Call strike price for $2, and the stock closes at $27 on expiration date you will have:
-Made a $2 profit
-Lost $2 on the trade
-Broken even on the trade

Back 38

BROKEN EVEN on the trade

Front 39

To define your posture means to:
-Define your sentiment on market direction
-look for the winner between the bulls and the bears

Back 39

Define your SENTIMENT on Market DIRECTION

Front 40

To define your posture, essentially means to define your ______ on market ______

Back 40

Sentiment

Market Direction

Front 41

Defining your sentiment on market direction, is essentially defining your _______

Back 41

POSTURE

Front 42

If the intermediate (green) market forecast line is approaching the 80 range on its chart, you should become what?

Back 42

BECOME CAUTIOUS because the market is entering an OVERBOUGHT REVERSAL ZONE

Front 43

If the intermediate (green) market forecast line is approaching the 80 range on its chart, you should become what?
WHY?

Back 43

CAUTIOUS because the market is entering an OVERBOUGHT REVERSAL ZONE

Front 44

On the left menu of the Strategies Tab, the Intermarket Analysis link shows you the GNP economic indicator. If this indicator is UP, the stock reaction will be:
-UP
-DOWN
-SIdeways

Back 44

UP

Front 45

x If you want to define your general market sentiment (not very short-term, but not very long term either) you might look at which Market Forecast line?

Back 45

Intermediate

Front 46

(T/F) Before trading any strategy, it is very important to define your posture by using the Market Posture, Market Forecast and Volatility Index

Back 46

TRUE

Front 47

X Before trading any strategy, it is very important to define your market posture by using what 3 tools?

Back 47

Market Posture

Market Forecast

Volatility Index

Front 48

(T/F) Buying Call options is a short-term strategy, so it's not important to concern yourself with the Industry or Market trend lines.

Back 48

FALSE

Front 49

x What item below is NOT a factor to consider for EXITING a call play?
-Stock has reached overhead resistance
-MACD has hit a peak and started to decline
-Stock's price is up, but the volume is also high
-Option premium has just hit its stop loss amount

Back 49

C

Front 50

What 3 factors do you want to consider for exiting a call play?

Back 50

-Stock has hit its resistance level

-MACD has hit a PEAK and started to DECLINE

-Option premium has just hit its Stop Loss amount

Front 51

As you are entering the option trade into the computer, if you enter the number 10 into the quantity field, the trade would represent how many shares of stock?

Back 51

1000

Front 52

XAssume you purchase a $40 call strike price and pay a $4 premium. If you "EXERCISE" this contract, you will do what?

Back 52

Buy shares of stock at $40 per share

Front 53

(T/F) When considering put contracts, if the stock is rallying on high volumes and falling on lower volumes, this is a good indication for put plays.

Back 53

FALSE

Front 54

X Assume Stock ABC is trading at $47.50. If you found that you wanted to take on a VERY AGGRESSIVE put option play, you might consider purchasing which put strike price?
-$55
-$50
-$47.50
$40

Back 54

$40

Front 55

If a stock was trading at $59 per share and dropped to $54 per share by the end of the week, which strike price would be considered at-the-money at the end of the week?
-$65
-$60
-$55
-$40

Back 55

$55

Front 56

If you were to purchase 3 PUT contracts costing $3.50 per share,how much money would it cost you for the trade?
(Not including commissions)

Back 56

$1050

Front 57

PUT Premiums usually rise as what falls?

Back 57

Stock Prices

Front 58

X As Stock prices FALL, what usually happens to PUT Premiums?

Back 58

RISE

Front 59

When "running the numbers" to determine if the Covered Call strategy is worthwhile to you, the "% Return Called Out" field shows you what?

Back 59

The TOTAL % you gained or lost by getting called out

Front 60

X Suppose a stock is priced at $45 on the day you sell a covered call. Three weeks later, the stock has fallen down in value to $44. If you need to get out of the covered call contract, you will likely:
(buy/Sell) it back (higher/lower/same) than you sold it for

Back 60

Buy it back for LOWER price than you SOLD it for

Front 61

x If you purchase shares of stock for $40 per share and sell a covered call for a premium of $2 per share, your break even point is what?

Back 61

38

Front 62

Do you need to determine the Strike Price to determine the Break even point?
Covered call strategy

Back 62

No.

Front 63

x If today is April 1st and you have a choice between selling April or May contracts, and you sell the May contracts then:
-You would have a LOWER risk of getting called out, but recieve a higher premium
-YOu would have a Higher risk of getting called out, but would recieve a lower premium
-You would have a lower risk of getting called out, but recieve a lower premium
-You would have a higher risk of getting called out, but recieve a higher premium

Back 63

? not c
Not a

Front 64

x If today is April 1st and you have a choice between selling April or May contracts, and you sell the May contracts then:

You would have a (higher/lower) risk of getting called out.
And/but receive a (higher/lower) premium

Back 64

HIGHER risk of getting called out. But receive a
HIGHER premium

Front 65

x If you purchased a stock for $26 strike price for a $4 premium, and got called out, you would have:
-taken a loss
-make a gain
-kept the stock, and made a gain
-lost the stock, and taken a loss

Back 65

MADE A GAIN!!

Front 66

(T/F) ETFs are "actively managed" just like mutual funds

Back 66

FALSE