Level 1

Question 1

Call

Answer 1

The RIGHT to buy

Question 2

Bid

Answer 2

(Buy) the price a broker or market maker is willing to pay to buy a security

Question 3

Ask

Answer 3

(Sell) the price the broker or market maker is willing to sell a security to someone

Question 4

Put

Answer 4

The RIGHT to sell

Question 5

Bid-Ask Spread

Answer 5

The difference between the bid and the ask. The size is an important market signal. The narrower the spread the more active the option is… thus the easier to make trades.

Question 6

Underlying Asset

Answer 6

On an options exchange, usually a stock or commodity, but can also be the value of a market index, interest rate, or even a characteristic of the market such as volatility

Question 7

What is an Option

Answer 7

A derivative, a financial contract that draws its value from the value of another asset (underlying asset), or the asset upon which an options value is drawn

Question 8

Leverage

Answer 8

The use of borrowed money to generate return for your buck. (UK: leverage = gearing)

Question 9

Options contracts and built in leverage

Answer 9

Allows buyers and sellers to make the same profit (or loss) for a lower amount of money than they could by trading in the underlying asset

Question 10

To be Long something…

Answer 10

Means to own it

Question 11

To be Short something…

Answer 11

Is to sell it

Question 12

If you are long a call….

Answer 12

You are betting that the price of the underlying asset goes up

Question 13

If you are long a put….

Answer 13

You are betting on the price going down

Question 14

If you are short a put….

Answer 14

You are betting the price of the underlying asset will be above the strike price

Question 15

If you are short a call

Answer 15

You’re betting that the price of the underlying asset will be below the strike price at expiration

Question 16

Writer and Buyer

Answer 16

The trader who decides to short an option- in effect, sell it to someone else— and the person who buys it is the buyer

Question 17

Options are based on specific amounts of underlying asset….

Answer 17

Option “control” or is “worth” 100 shares

Question 18

Mini version of options

Answer 18

Mini’s control smaller than 100 shares, and have smaller premiums, which makes them popular with individual traders

Question 19

Premium

Answer 19

The price of the derivatives

Question 20

Strike Price

Answer 20

The price at which an option can be exercised at any time up until expiration, if the stock pays a dividend or has a split the price will be adjusted automatically

Question 21

Out-of-the-money

Answer 21

(Not profitable) You can’t exercise this

Question 22

Options strategy in general

Answer 22

You have an increased percentage return because you earn the same dollar profit as you would the stock position for less money. And if the stock price goes down options limit your loss

Question 23

in-the-money

Answer 23

(Profitable) When market price is above the strike price for a call and below the strike price for a put

Question 24

Expiration Date

Answer 24

The day the option is no longer good, either holder and writer writer have to settle up by that date or the option becomes worthless

Question 25

American Option

Answer 25

Gives the holder the right but not the obligation to exercise the option at any point between the purchase date and the expiration date

Question 26

European Option

Answer 26

Can only be exercised in the expiration date

Question 27

Why was the futures market developed

Answer 27

To help people hedge and speculate on commodities, especially in the agricultural market. Options market is an outgrowth of the futures market