1. Which of the following statements concerning options pricing is correct?
    1. The Black-Scholes model is a discrete time pricing model, whereas the binomial model is referred to as continuous time.
    2. Binomial options pricing starts by considering two possible outcomes and one discrete period with the possibility of both assumptions being relaxed to accommodate actual market scenarios.
    3. Both binomial options pricing and the Black-Scholes models represent an options-specific application of the multi-factor model.
    4. None of the foregoing.
  2. None of the following choices constitute an acceptable use of options, except:
    1. Hedging.
    2. Speculation.
    3. Diversification.
    4. Gaining low cost exposure to the underlying.
    5. Income generation.
    6. None of the foregoing.
  3. Each of the following attributes characterize a low option premium, except:
    1. Close expiration date.
    2. Low stock price and the option is a call.
    3. High stock price and the option is a put.
    4. Deep in-the-money-call.
  4. An option that allows exercise only at expiration is referred to as:
    1. Asian
    2. European
    3. American
    4. Contango
  5. Arrange the following options by premium in ascending order. Assume that the month is September.
    1. January 60 call, underlying trades at 57
    2. October 44 put, underlying trades at 41
    3. July 53 call, underlying trades at 58
    4. April 27 call, underlying trades at 29
    1. IV, I, III, II
    2. I, II, III, IV
    3. I, IV, III, II
    4. I, IV, II, III
    5. II, I, IV, III


Review Answers

Related Articles
  1. Investing

    Options Volatility: Projected or Implied Volatility

    By John Summa, CTA, PhD, Founder of OptionsNerd.comMost traders generally think of the strike price in relation to the underlying price and how much time remains on the option as the key fundamentals ...
  2. Trading

    Breaking Down The Binomial Model To Value An Option

    Find out how to carve your way into this valuation model niche.
  3. Trading

    The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).
  4. Investing

    Option Volatility: Vertical Skews and Horizontal Skews

    By John Summa, CTA, PhD, Founder of OptionsNerd.comOne of the most interesting aspects of volatility analysis is the phenomenon known as a price skew. When options prices are used to compute ...
  5. Investing

    ESOs: Using the Binomial Model

    By David Harper On April 1, 2004, the Financial Accounting Standards Board (FASB) published a proposal on the new accounting treatment of employee stock options ESOs. The final rules will probably ...
  6. Investing

    Options Volatility: Valuation

    By John Summa, CTA, PhD, Founder of OptionsNerd.comAs we've already learned, volatility comes in two forms: statistical (historical volatility) and implied (IV). We saw how past levels of IV ...
  7. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  8. Investing

    Options Basics: How To Read An Options Table

    Sponsor: At last, an easy way to predict stock trends – get your FREE copy of 5 Chart Patterns You Need to Know. By Jay Kaeppel As more and more traders have learned of the multitude of ...
  9. Investing

    Examples To Understand The Binomial Option Pricing Model

    Binomial option pricing model, based on risk neutral valuation, offers a unique alternative to Black-Scholes. Here are detailed examples with calculations using Binomial model and explanation ...
  10. Trading

    Options Pricing: Modeling

    Option traders utilize various option price models to attempt to set a current theoretical value. Models use certain fixed knowns in the present – factors such as underlying price, strike ...
Trading Center