Summary
An option is a contract that grants its owner the right, but not the obligation, to make a transaction in an underlying commodity or security at a certain price within a set time in the future. Calls and puts are the building blocks of options strategy. They can be combined, sometimes with positions in underlying commodities, to form options spreads or synthetic instruments.

Review

CFTC rules allow for the side-by-side trading of futures and options on futures on the same exchange. SEC regulations proscribe exchange-traded options and the underlying on the same exchange, by contrast. Options on futures allow investors to manage risk at one remove from the underlying where obligation to enter into contracts is symmetrical. Options permit holders to buy or sell the underlying, whereas writers (sellers) are obligated to satisfy the terms of the option. Options on futures add considerably to the risk management opportunities of futures investors.

  1. An out-of-the-money option's intrinsic value is:
    1. Its strike price minus is spot price
    2. Its spot price minus its strike price
    3. Its premium price
    4. $0
  2. 1 MNO May 20 put @ 2. At which spot price(s) would the long put be in-the-money?

I. $16

II. $18

III. $22

IV. $24


a. I only

b. I and II

c. III and IV

d. IV only


  1. Which TWO are bullish option strategies?

I. Writing covered calls above market

II. Writing covered calls below market

III. Writing uncovered puts

IV. Writing uncovered calls


a. I and III

b. I and IV

c. II and III

d. II and IV


  1. Which statement is TRUE about writing covered calls?
a. It is a risk-free strategy

b. Physical delivery is not required upon exercise.

c. The writer must have cash on deposit equal to the cost to purchase the shares from the option holder.

d. It is a bearish strategy.


  1. A call bull spread:
    1. benefits the investor when the basis narrows.
    2. is an example of a calendar spread.
    3. consists of buying an in-the-money call and selling an out-of-the-money call.
    4. has no downside limit if the underlying commodity goes to $0.

  2. A strangle differs from a straddle in that the latter strategy uses different strike prices.
    1. True
    2. False

  3. All of the following strategies are bullish except
    1. Writing puts
    2. A credit put spread
    3. Short futures
    4. Long shares.

  4. An investor puts on a straddle trade if he is sure of the market's direction
    1. False
    2. True

  5. In a debit call spread, the breakeven price is
    1. The strike price minus the net premium
    2. The strike price plus the net premium
    3. Net premium in excess of the higher options's strike price.
    4. The net premium below the lower option's strike price.
  6. A synthetic long call consists of
    1. Long futures
    2. Short futures plus long put.
    3. Long futures plus long put.
    4. Long futures plus short call





Answers

Related Articles
  1. Trading

    Strategies for Trading Volatility With Options (NFLX)

    These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility.
  2. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  3. Trading

    4 Popular Options Strategies for 2016

    Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for 2016.
  4. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  5. Trading

    Get Familiar with These 6 Option Strategies

    When you’re ready to move beyond the basics of investing, it’s time to learn your options.
  6. Trading

    Bear Put Spreads: A Roaring Alternative To Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  7. Trading

    How To Profit From Volatility

    We explain four key strategies to profit fom volatility in markets.
  8. Trading

    The Dangerous Lure Of Cheap Out-Of-The-Money Options

    Betting on an expected move is fine, but one must understand the risks involved in a position - and consider the alternatives.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center