Quiz. Do You Understand Option Basics?

Options Quiz for Rookies

Option Quiz
Option Quiz. Pixabay

If you are fairly new to the concept of using options and if you have taken some lessons, viewed a few seminar recordings, or read one or more books, it is a good idea to determine how well you grasp the basic concepts about options before moving forward.

If you want any chance to find success as an investor or trader who uses options, then the basic concepts must be understood. I know that it is tempting to move forward with new material because you are eager to learn as much as possible.

But, if you are uncertain about some of the most basic ideas concerning options, then it will prove to be very difficult to understand the more advanced concepts.

The quiz that follows is designed to test your basic knowledge. Please read the questions carefully. They are not designed to be tricky.


QUIZ
Answers are located here.

 

1. When you buy options, your losses are limited. True or False.

2. When you sell options, your losses are limited. True or False.

3. You own one option: XYZ Feb 16 '15 75 call.
          What is the strike price?
          When does this option expire?
          What is the underlying asset?

4. If you exercise a call option that you own, what happens?        

5. If you are on an option that you own, what happens?

6. When you buy or sell any option(s), must you be concerned about the financial condition of the person on the other side of the trade? If he/she goes bankrupt, is your option still valid?

 

7. All options work exactly the same way, regardless of whether the underlying asset is a stock, ETF, or Index? True or False?

8. You instruct your broker to buy 10 ABCD Nov 18 '16 45 calls at the  price of $1.35, or better. A few seconds later you receive a confirmation that you bought those 10 calls at $1.40 each.

Is that ok with you?

9. You instruct your broker to buy a calendar spread. Using a limit order, you want to buy 3 IBM April calls and sell 3 IBM March calls. The limit price is $2.00, or better. At the end of the day, your broker tells you that you bought the April calls but that he was unable to sell the March calls. Your position is now long 3 IBM April calls. Is that ok with you?

10. You sold 6 RGTO puts with a strike price of $20 per share. When expiration arrives, you are still short those puts (i.e., you never bought those options to close the position). The closing price for this stock on expiration Friday is $19.87. What, if anything, do you expect to happen?

 

Bonus question:This is a much less common situation. 
11. Do you know the rules? You own 3 GE (General Electric) put options with a strike price of $25. At expiration, you still own the options (this is a mistake because you should have sold them) and the stock price is $24.99.  You call the broker one minute after the market closes on expiration Friday, and he tells you that there is nothing you can do -- because the options can no longer be traded -- and that these options (according to exchange rules) will be exercised automatically for you.

As a result you will sell 300 shares of GE at $25 per share. This is not what you want to do. Your plan was to allow the options to expire worthless. Was your broker's statement correct?