Options Trading

Question 1

Concept of Implied Volatility

Answer 1

What Marketplace is implying the volatility of the stock will be in the future in respect to price changes in an option

Question 2

How can Implied Volatility estimate potential range of movement on a stock

Answer 2

• Expressed as percentage of the stock
• Indicating one standard deviation move for T = 1

Question 3

stock XYZ is trading at $50, and the implied volatility of an option contract is 20%. -> implies that

Answer 3

• consensus in the marketplace that a one standard deviation move over the next 12 months will be plus or minus:

($50 x 0.20) = $10

Question 4

Percentage of one standard deviation on normal distribution

Answer 4

68%

Question 5

Percentage of two standard deviation on normal distribution

Answer 5

95%

Question 6

Percentage of three standard deviation on normal distribution

Answer 6

99%

Question 7

How much percentage of the time will stock be above $60 and how much percentage of the time still stock be below $40

Answer 7

16% of the time above $60

16% of the time below $40

Question 8

Implied volatility can help you gauge

Answer 8

the probability that a stock will wind up at any given price at the end of a 12-month period

Question 9

Calculation for one standard deviation move over the life of an option

Answer 9

Question 10

Delta

Answer 10

change in option price per $1 change in stock price

Question 11

In respect to Delta: in-the-money options will move more than

Answer 11

out-of-the-money options

Question 12

In respect to Delta: short-term options will react more than

Answer 12

longer-term options to the same price change in the stock

Question 13

Delta probability concept

Answer 13

as the probability an option will finish in-the-money

Question 14

Gamma

Answer 14

change in delta in respect to ever $1 change in underlying asset

Question 15

Options with the highest gamma are

Answer 15

the most responsive to changes in the price of the underlying stock

Question 16

Put Credit Spread set up

Answer 16

Known as: Bull Put Spread

Short 1 OTM Put

Long 1 OTM Put lower K

result: net credit

Question 17

Put Credit Spread Volatility Impact

Answer 17

Enter trade when IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

Question 18

Put Credit Spread Time Decay

Answer 18

Theta works positively for the position

Expect all or part of the trade to expire worthless

Question 19

Short Naked Put set up

Answer 19

Short 1 OTM Put below market

Question 20

Short Naked Put Volatility Impact

Answer 20

Enter trade when IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

Question 21

Short Naked Put Time Decay

Answer 21

Theta works positively for the position.

Expect all or part of the trade to expire worthless at expiration

Question 22

Put Broken Wing Butterfly set up

Answer 22

Long 1 ITM Put

Short 2 OTM Puts near ATM

Skip Strike

Long 1 OTM Put

Result: Net Credit

Question 23

Put Broken Wing Butterfly Volatility Impact

Answer 23

Enter trade when IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

Question 24

Put Broken Wing Butterfly Time Decay

Answer 24

Theta works postively for this position.

Expect all or part of the trade to expire worthless at expiration

Question 25

Custom Naked Put set up

Answer 25

Short 1 OTM Put Short 1 OTM Call Long 1 OTM Call higher K

Question 26

Custom Naked Put Volatility Impact

Answer 26

Enter trade when IV Rank is above 50 Falling IV will help position Rising IV will hurt position

Question 27

Custom Naked Put Time Decay

Answer 27

Theta works positively for this position. Expect all or part of the trade to expire worthless at expiration

Question 28

Call Debit Spread set up

Answer 28

Long 1 ITM Call Short 1 OTM Call at higher K Result: Net Debit

Question 29

Call Debit Spread Volatility Impact

Answer 29

Enter trade when IV Rank is below 50 Falling IV will hurt position Rising IV will help position

Question 30

Call Debit Spread Time Decay

Answer 30

Theta works negatively against position If strategy not ITM at expiration then it expires worthless

Question 31

Call Calendar Spread set up

Answer 31

Short 1 OTM Call in the Front Month Long 1 OTM Call in the Back Month w/ same K Result: Net Debit

Question 32

Call Calendar Spread Volatility Impact

Answer 32

Enter trade if IV Rank below 50 Falling IV hurt position Rising IV will help position

Question 33

Call Calendar Spread Time Decay

Answer 33

Theta works positively with position as long as the stock remains range bound which maxes the monthly contract skew

Question 34

Call (Ratio) Backspread set up

Answer 34

Short 1 ATM Call Long 2 OTM Calls higher K

Question 35

Call (Ratio) Backspread Volatility Impact

Answer 35

Trade when Rank IV below 50 Falling IV will hurt position Rising IV will help position

Question 36

Call (Ratio) Backspread Time Decay

Answer 36

Theta works negatively If not ITM at expiration then expires worthless

Question 37

Put Diagonal Spread set up

Answer 37

Short 1 OTM Put in the Front Month Long 1 OTM Put in the Back Month at lower K Result: Net Debit

Question 38

Put Diagonal Spread Volatility Impact

Answer 38

Trade when Rank IV below 50 Falling IV will hurt position Rising IV will help position

Question 39

Put Diagonal Spread Time Decay

Answer 39

Theta works positively with position as long as stock reamins range bound which maxes the monthly contract skew

Question 40

Short Straddle set up

Answer 40

Short 1 ATM Put Short 1 ATM Call same K Result: Net Credit

Question 41

Short Straddle Volatility Impact

Answer 41

Rank IV above 50 Falling IV will help position Rising IV will hurt position

Question 42

Short Straddle Time Decay

Answer 42

Theta works positively for the position Expect all or part of the trade to expire worthless at expiration

Question 43

Short Strangle set up

Answer 43

Short 1 OTM Put Short 1 OTM Call higher K Result: Net Credit

Question 44

Short Strangle Volatility Impact

Answer 44

IV Rank above 50 Falling IV will help position Rising IV will hurt position

Question 45

Short Strangle Time Decay

Answer 45

Theta works positively Expect all or part of the trade to expire worthless at expiration

Question 46

Short Iron Condor set up

Answer 46

Short 1 OTM Put Long 1 OTM Put lower K Short 1 OTM Call Long 1 OTM Call higher K

Question 47

Short Iron Condor Volatility Impact

Answer 47

IV Rank above 50 Falling IV will help position Rising IV will hurt position

Question 48

Short Iron Condor Time Decay

Answer 48

Theta works positively expect all or part of the trade to expire worthless at expiration

Question 49

Short Iron Butterfly set up

Answer 49

Short 1 ATM Put Long 1 OTM Put at Lower Strike Short 1 ATM Call Long 1 OTM Call Higher Strike Result: Net Credit

Question 50

Short Iron Butterfly Volatility Impact

Answer 50

IV Rank above 50 Falling IV will help position Rising IV will hurt position

Question 51

Short Iron Butterfly Time Decay

Answer 51

Theta is positive Expect all or part of the trade to expire worthless at expiration

Question 52

IV Rank below 50 and Neutral on the underlying direction of the stock

Answer 52

Do not make any trades

Question 53

Call Credit Spread set up

Answer 53

Short 1 OTM Call Long 1 OTM Call at Higher K Result: Net overall credit

Question 54

Call Credit Spread Volatility Impact

Answer 54

IV rank above 50 Falling IV will help position Rising IV will hurt position

Question 55

Call Credit Spread Time Decay

Answer 55

Theta positive Expect all or part of the trade to expire worthless at expiration

Question 56

Short Naked Call set up

Answer 56

Short 1 OTM Call above market

Question 57

Short Naked Call Volatility Impact

Answer 57

IV Rank above 50 Falling IV will help position Rising IV will hurt position

Question 58

Short Naked Call Time Decay

Answer 58

Theta is positive Falling IV will help position Rising IV will hurt position

Question 59

Call Broken Wing Butterfly set up

Answer 59

Long 1 ITM Call Short 2 OTM Calls near ATM Skip Strike Long 1 OTM Call Result: Net Credit

Question 60

Call Broken Wing Butterfly Volatility Impact

Answer 60

IV Rank above 50 Falling IV will help position Rising IV will hurt position

Question 61

Call Broken Wing Butterfly Time Decay

Answer 61

Theta positive Expect all or part of the trade to expire worthless at expiration

Question 62

Custom Naked Call set up

Answer 62

Short 1 OTM Call Short 1 OTM Put Long 1 OTM Put Lower K

Question 63

Custom Naked Call Volatility Impact

Answer 63

IV Rank is above 50 Falling IV will help position Rising IV will hurt position

Question 64

Custom Naked Call Time Decay

Answer 64

Theta works positively Expect all or part of the trade to expire worthless at expiration

Question 65

Put Debit Spread set up

Answer 65

Long 1 ITM Put Short 1 OTM Put at lower K Result: Net Debit

Question 66

Put Debit Spread Volatility Impact

Answer 66

IV Rank below 50 Falling IV will hurt this position Rising IV will help this position

Question 67

Put Debit Spread Time Decay

Answer 67

Theta works negatively If strategy is not ITM at expiration then it expires worthless

Question 68

Put Calendar Spread set up

Answer 68

Short 1 OTM put in the Front Month Long 1 OTM Put in the Back Month at same K Result: Net Debit

Question 69

Put Calendar Spread Volatility Impact

Answer 69

IV Rank is below 50 Falling IV will hurt position Rising IV will help position

Question 70

Put Calendar Spread Time Decay

Answer 70

Theta works positively as long as the stock remains range bound which maxes the monthly contract skew

Question 71

Put (Ratio) Backspread set up

Answer 71

Short 1 ATM Put Long 2 OTM Put at lower K Result: Net Debit

Question 72

Put (Ratio) Backspread Volatility Impact

Answer 72

IV Rank is below 50 Falling IV will hurt position Rising IV will help position

Question 73

Put (Ratio) Backspread Time Decay

Answer 73

Theta works negatively If strategy is not ITM at expiration it expires worthless

Question 74

Call Diagonal Spread set up

Answer 74

Short 1 OTM Call in the Front Month Long 1 OTM Call in the Back Month at higher K Result: Net Debit

Question 75

Call Diagonal Spread Volatililty Impact

Answer 75

IV Rank below 50 Falling IV will hurt position Rising IV will help position

Question 76

Call Diagonal Spread Time Decay

Answer 76

Theta works positively as long as the stock remains range bound which maxes monthly contract skew

Question 77

Option Pricing 2 components

Answer 77

Intrinsic Value and Extrinsic Value (Time Value)

Question 78

What are the components of Intrinsic Value

Answer 78

Spot Price and Strike Price

Question 79

What are the components of Extrinsic Value (Time Value)

Answer 79

Time to Maturity Volatility Rate of Interest

Question 80

Bullish Strategies:

Answer 80

Put Credit Spread Call Debit Spread Call Calendar Spread Put Broken Wing Butterfly Put Diagonal Spread Custom Put Spread Call (Ratio) Spread Short Single Naked Put

Question 81

Neutral Stratergies

Answer 81

Balanced Iron Condor Short Strangle Short Straddle Skewed Iron Condor Iron Butterfly

Question 82

Bearish Stratergies

Answer 82

Call Credit Spread Put Debit Spread Call Broken Wing Butterfly Call Diagonal Spread Custom Naked Call Spread Put (Ratio) Backspread Short Single Naked Call

Question 83

ITM PUT

Answer 83

When K \> S = max{0, K-S}

Question 84

OTM PUT

Answer 84

When K \< S = max{0, K-S}

Question 85

ITM CALL

Answer 85

When K \< S = max{0, S-K}

Question 86

OTM CALL

Answer 86

When K \> S = max{0, S-K}

Question 87

Theta: 90-day options vs 30-day options

Answer 87

90-day options will loose less value per day than 30-day options with same K

Question 88

IV: 90-day options vs 30-day options

Answer 88

90-day options react MORE to changes in implied volatility than 30-day options with same K