You sell a 25∆ put. What are the odds this option expires OTM?
25%
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50%
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75%
Correct! A 25∆ put only has a 25% chance of expiring ITM. So it's probability of expiring OTM is the inverse: 100% - 25% = 75%.
100%
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If you are assigned on a short put, what will that mean?
You must buy 100 shares at the strike price
Correct! If you are assigned on a short put, it means you are obligated to buy 100 shares at the strike price.
You have the option to buy 100 shares at the strike price
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You must sell 100 shares at the strike price
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You have the option to sell 100 shares at the strike price
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You sold short shares at $50 per share. Which of these scenarios is best for your position?
The share price goes to $100
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The share price goes to $55
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The share price goes to $45
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The share price goes to $1
Correct! This would be an amazing scenario. Your short shares profit when their price declines. $1 per share would be an almost maximum profit
First you sell 10 shares at $50. Then you sell 10 more at $45, and 10 at $42. What is happening to your break even?
It is worsening
Correct! Your position is profiting as the share price declines, however by selling more shares at lower and lower prices, you are dragging your break-even down and increasing your total risk.
It is improving
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It is not affected
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It is getting larger
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You sell a 35 strike put for $1.00. What is your max loss?
$35
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$1
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$100
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$3400
Correct! The maximum loss would occur if the value of the shares dropped to $0. Since you collected $1 for the $35 put, your break even is at $34. 100 shares times $34 is $3400.
How would you close a short share position if you're short 100 shares at $30? The current share price is $25.
Sell your shares for a total credit of $3000
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Buy 100 shares for a total debit of $3000
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Sell your shares for a total credit of $2500
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Buy 100 shares for a total debit of $2500
Correct! You are short shares, so you must buy them back to close them. The current market value is $25 per share, so you can buy your 100 shares back for a total debit of $2500 – a $500 profit!
Share price is shown along which axis of a risk profile?
X
Correct! The X-axis of a risk profile is used to indicate changes in share price
Y
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Short options carry negative gamma. What does this mean?
As the share price rises, delta will decrease
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As the position profits, delta will decrease
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As the position loses, delta will increase
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All of the above
Correct! All of these are true about negative gamma. It means that delta will decrease (or become more negative) as share price rises. Delta shrinks into profit, and grows into loss.
XYZ is trading for $35. You paid $0.50 for the 30∆ call. What is your max loss?
$35
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$3500
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$50
Correct! The most you can lose on a long call is the amount you pay for it. In this case, you paid $0.50 – $0.50 × 100 shares = $50
$500
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You own 50 shares XYZ at $50. It is currently trading for $19.02. What is your P/L?
-$309.80
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-$1549.00
Correct! XYZ has dropped by $30.98. 50 shares x (-$30.98) = -$1549; a net loss.
-$1902.00
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-$3098.00
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Do short puts carry positive or negative delta?
Positive delta
Correct! Short puts are a bullish strategy. Bullish strategies carry positive delta.
Negative delta
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Neutral delta
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They can carry either one
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XYZ is trading for $35. Which put will have the highest value?
30∆
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40∆
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$30 strike
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$40 strike
Correct! The $40 strike would be the deepest ITM and would therefore be priced the highest.
You buy a 35 put in XYZ for $1.00. In which scenario would this trade be profitable at expiration?
XYZ @ $33
Correct! Your break even would be $34 (35 - $1). You would profit $100 if this put expired at $33.
XYZ @ $34
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XYZ @ $35
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XYZ @ $36
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What does it mean when a risk graph intersects with $0 along the Y-axis?
You have lost all your money
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The position is breaking even
You got it! Any point of a risk graph that crosses $0 along the Y-axis is a break-even point for that strategy
There is no time left in the trade
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The share price is $0
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How does implied volatility expansion affect long options?
It harms their value
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It boosts their value
Correct! Long options carry positive vega which means they are benefited by expansions in implied volatility. When implied volatility rises, extrinsic value increases boosting the value of long options.
It does not affect their value
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It randomly affects their value
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Implied volatility has been declining. How does this affect the value of your short put?
It harms P/L
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It benefits P/L
Correct! Short options are positively impacted by declining implied volatility. When volatility contracts, extrinsic value decays, allowing option short-sellers to close their positions at cheaper prices.
It does not affect P/L
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It randomly affects P/L
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You own 100 shares of XYZ at $65 per share. What is your maximum profit?
$65.00
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$650.00
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$6500.00
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Unlimited Profit
Correct! Share ownership theoretically allows you to profit without limit as long as value continues to increase. However, nothing goes up forever.
XYZ is trading for $50. Which of these call strikes will most resemble the risk of 100 long shares?
$30
Correct! The $30 strike would be deepest ITM and have the highest delta value. As delta approaches 100, the risk increasingly resembles that of 100 shares.
$45
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$50
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$65
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What happens to your short call if IV expands without any price change?
It will lose money
Correct! Short options, such as a short call, carry negative vega. This means they profit when implied volatility contracts, and lose money when volatility expands.
It will profit
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Nothing
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It will expire worthless
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Long options carry negative theta. What does that mean?
They are bearish positions
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They profit off of decreasing volatility
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Their delta shrinks over time
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They lose value over time
Correct! Negative theta means the option is negatively impacted by the passage of time. All extrinsic value in the option will decay to 0 by expiration.