MCQs > Stocks & Investments > Options Trading MCQs > Basic Options Trading MCQs

Basic Options Trading MCQ

1. Which of the following would not be an example of managing risk?

Answer

Correct Answer: Investing completely in a new biotech firm

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2. Which of the following is a way to quantify the risk of a given security?

Answer

Correct Answer: Calculate the probability and magnitude of potential loss

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3. How would an options investor diversify their portfolio?

Answer

Correct Answer: All of the above

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4. Which of the following is a common strategy used after an options trader has had a few successful transactions?

Answer

Correct Answer: They withdraw their original capital and use only profits to trade with.

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5. What would an investor who is employing the straddle technique hope to happen?

Answer

Correct Answer: That the price will move drastically in one direction, up or down

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6. What should an options investor do if a call option they own is out of the money and nearing expiration?

Answer

Correct Answer: Depends on their tolerance level for risk and their strategy

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7. Which of the following would be a good example of risk mitigation?

Answer

Correct Answer: Purchasing stock options in three industries

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8. What would be the objective of a conservative trader's portfolio?

Answer

Correct Answer: Long term returns over time

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9. Which of the following would technical analysis include?

Answer

Correct Answer: Stock pricing

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10. What does heavy volume trading indicate?

Answer

Correct Answer: Typically that news has come out regarding the underlying stock

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11. What is the offset to limiting downside?

Answer

Correct Answer: Often limited profits

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12. What does the Monte Carlo method of pricing options attempt to do?

Answer

Correct Answer: Calculate a price based on weighting potential outcomes

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13. What would an investor with a large risk tolerance level most likely do?

Answer

Correct Answer: Sell options of a security of which they do not own the underlying stock

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14. Why is it important to manage risk when trading stock options?

Answer

Correct Answer: Because of the risky nature of stock options

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15. What is the "expiration date"?

Answer

Correct Answer: The date on which the options contract expires and can no longer be executed or traded

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16. What is meant by "long" in a stock or option?

Answer

Correct Answer: Intention to hold a security for a long period of time

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17. Which of the following would help protect against downside risk?

Answer

Correct Answer: Placing a limit order

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18. Why would an investor not utilize an options trading strategy?

Answer

Correct Answer: Because of the belief that they do not work, and it is a wasted effort

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19. Which of the following situations has the least risk?

Answer

Correct Answer: Selling covered call options

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20. Why would someone sell call options on a security they own?

Answer

Correct Answer: Because they believe the security price will fall, creating profit from the calls

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21. Which of the following is the most profitable?

Answer

Correct Answer: Deep in the money call options

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22. What is candlesticking?

Answer

Correct Answer: A charting technique which shows price movements over time indicating the high and the low daily

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23. How does the "Iron Condor" technique limit the downside?

Answer

Correct Answer: The shorted options have different strike prices, creating a stagger.

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24. How is risk measured?

Answer

Correct Answer: Individually, each investor assesses their own risk tolerance level

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25. What is the primary goal of technical analysis?

Answer

Correct Answer: Identifying trends to predict near term price movements

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26. Why would an options trader want to create various portfolios?

Answer

Correct Answer: Because each portfolio would be set up to meet specific goals

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27. What is the purpose of candlestick charting?

Answer

Correct Answer: A lot of price information such as open, close, high and low can be relayed in a graph.

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28. What happens when a trader uses a straddle?

Answer

Correct Answer: They buy a call and a put option at the same strike price.

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29. What is the relationship between fundamental and technical analyses?

Answer

Correct Answer: They can both be used to complement each other, but not together.

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30. What would an investor using the Black Scholes model be doing?

Answer

Correct Answer: Calculating the implied price of an option based on several factors

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31. What is meant "short selling"?

Answer

Correct Answer: Selling a stock without owning it, with the expectation of purchasing the stock at a later date at a cheaper price

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32. Which of the following is an assumption made by a technical analyst?

Answer

Correct Answer: The stock price already reflects all news and news events and they do not impact a stock's price.

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33. What is a "strangle"?

Answer

Correct Answer: Buying or selling a put and a call with different strike prices

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34. What is the legal requirement regarding portfolios?

Answer

Correct Answer: There is no legal requirement to create portfolios.

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35. What is a "put"?

Answer

Correct Answer: An options contract which gives the holder the right to sell the underlying stock at a predetermined price

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36. What is an "option spread"?

Answer

Correct Answer: Buying and selling stock options at different strike prices for the same security

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37. What is meant by a "bull market"?

Answer

Correct Answer: When expectations are that the market will rise

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38. What factors does technical analysis primarily rely on?

Answer

Correct Answer: Past price and volume

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39. How often should a trader revaluate the holdings in their portfolios?

Answer

Correct Answer: Continuously, but not daily

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40. Which of the following would not be an example of managing risk?

Answer

Correct Answer: Selling calls on a security which is owned

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41. Which of the following would most likely be a way to classify various portfolios?

Answer

Correct Answer: By the time horizon of the investments contained within it

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42. Which of the following is an example of options used to mitigate risk?

Answer

Correct Answer: Buying a put option for a stock which is currently owned

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43. Which of the following would be a way to limit one's potential losses?

Answer

Correct Answer: Not using margin to trade with

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44. Why would an investor be unlikely to hold growth, value, small cap, and index portfolios all at once?

Answer

Correct Answer: Because they are completely different investment perspectives

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45. Why do investors often expect the beginning of the year stock prices to rise?

Answer

Correct Answer: Because the year end sales typically bolster profits and increase demand

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46. Which of the following is a criticism of both fundamental and technical analyses?

Answer

Correct Answer: Neither one can accurately predict future stock price movements.

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47. What is portfolio management?

Answer

Correct Answer: Having a suite of investments to reach a goal while minimizing risk

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48. What happens to an investment if risk is mitigated properly?

Answer

Correct Answer: Nothing specific happens to any one investment; risk mitigation is an overall portfolio tool.

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49. Which of the following is an advantage of having multiple portfolios instead of only one?

Answer

Correct Answer: Goals can be set for each portfolio and tracked separately.

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50. Why would an options trader invest only in options of companies which have a history of paying dividends?

Answer

Correct Answer: Because it lowers risk in investment

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51. What is a sideways chart?

Answer

Correct Answer: When a stock price moves within a relatively narrow band

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52. What is meant by a "bear market"?

Answer

Correct Answer: When expectations are that the market will fall

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53. Why might an options trader have portfolios based on expiration?

Answer

Correct Answer: Because options expiring in the near term need to be monitored more actively

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54. Why would a trader liquidate a portfolio?

Answer

Correct Answer: Because he is no longer interested in the classification of stocks

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55. Which of the following is the least risky investment in options?

Answer

Correct Answer: Selling options which expire one year from now

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56. What does an options trader look for when charting?

Answer

Correct Answer: Options which have broken the trend

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57. What is "strike price"?

Answer

Correct Answer: The price on an options contract at which the underlying stock can be bought or sold

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58. What is meant by a "butterfly" trading strategy?

Answer

Correct Answer: Complex trading strategy involving buying two calls and selling two calls

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59. Would a person who actively buys and sells options contracts be considered an investor?

Answer

Correct Answer: No, they are a trader looking for short term gains.

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60. What is a "call"?

Answer

Correct Answer: An options contract which gives the holder the right to buy a stock at a predetermined price

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61. When is the straddle trading strategy appropriate?

Answer

Correct Answer: When an investor believes there will be a large stock price movement, but does not know in which direction

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62. What would be the risk tolerance level of a retired government worker in general?

Answer

Correct Answer: Low

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63. What is the primary method to mitigate risk?

Answer

Correct Answer: Diversifying investment holdings

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64. What is meant by using the straddle stock trading strategy?

Answer

Correct Answer: When an investor owns both call and put stock options at the same stock price

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65. What is meant by a covered call?

Answer

Correct Answer: Buying a stock, and selling a call at the same time

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66. How would an options trader use the Black Scholes pricing model as a trading strategy?

Answer

Correct Answer: To look for options which are priced in the market at less than the Black Scholes price

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67. How often would an active options trader perform technical analysis?

Answer

Correct Answer: It is an ongoing process performed during the hours after each day's activity.

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68. Which type of analysis relies on charting?

Answer

Correct Answer: Both Fundamental and Technical

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69. What is a "margin account"?

Answer

Correct Answer: A stock trading account which allows the holder to borrow money from the broker

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70. What would an investor who is bullish most likely do?

Answer

Correct Answer: Buy call options

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71. What is the ideal number of portfolios for an experienced trader?

Answer

Correct Answer: 5

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72. Why is it important for an investor to know their risk tolerance level before trading options and investing in general?

Answer

Correct Answer: Because they can match their risk tolerance level with the types of stocks they are purchasing

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73. Why are younger people more apt to take on riskier investments?

Answer

Correct Answer: Because they have a longer time horizon to allow for the risky investments to increase over time, and are immune to the short term changes

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74. What is a "straddle"?

Answer

Correct Answer: Holding both a call and a put at the same strike price

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75. Why would someone buy call options at the same strike price but stagger the expiration date?

Answer

Correct Answer: Because they believe there will be an upward movement in the price but are uncertain of the timing

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76. How does selling options help someone with their portfolio?

Answer

Correct Answer: They can profit from the sale of options without having to cover them.

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77. What should a trader do if one portfolio is outperforming the others?

Answer

Correct Answer: Depends on the goals of each portfolio; they could still all be meeting expectations.

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78. What is an options contract?

Answer

Correct Answer: A contract to buy or sell a stock at a predetermined price

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79. When would someone most likely place a stop loss order?

Answer

Correct Answer: When they own deep in the money call options

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80. What is the purpose of using screening factors?

Answer

Correct Answer: They are preset criteria that any investment must meet before an investor will consider it a viable investment.

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81. Which of the following is the optimal situation?

Answer

Correct Answer: Limiting downsize risk while having the most upside potential possible

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82. What is the most classic type of options trading?

Answer

Correct Answer: Buying call options and selling after an increase in value

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