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Test answers for Options Trading Test 2016

(82) Last updated: January 27
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82 NOT Answered Yet Test Questions:

(hold on, will be updated soon)
1. What is the most classic type of options trading?

Answers:

• Using sophisticated techniques such as Iron Condor

• Short selling stocks

• Buying call options and selling after an increase in value

• Selling naked call options

2. Which of the following is the optimal situation?

Answers:

• Selling uncovered calls and having the stock price rise

• Limiting downsize risk while having the most upside potential possible

• Short selling stocks and having the price of the stock rise

• Trading options with late expiration dates

3. What is the purpose of using screening factors?

Answers:

• They help focus in on a specific industry.

• They guarantee against any losses.

• They help investors decide when to exit an investment.

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

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

Answers:

• When they own options which are out of the money and close to expiration

• When they are short selling stocks

• When they have sold substantial amounts of put options

• When they own deep in the money call options

5. What is a covered call?

Answers:

• Selling put options

• Short selling stocks

• Selling a call option when the underlying stock is not owned

• Selling a call stock option when the underlying stock is owned

6. What is an options contract?

Answers:

• Another term for stock

• A contract to buy or sell a stock at a predetermined price

• Insurance

• A contract with your broker to buy and sell stocks

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

Answers:

• Sell off all stock in the worst portfolio.

• Switch the portfolios around so they all have the same return.

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

• Do extensive analysis on the stocks.

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

Answers:

• It creates additional risk.

• They can profit from the sale of options without having to cover them.

• It guarantees small profits.

• It forces the market price of the underlying stock up.

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

Answers:

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

• Because they believe there will be an upward price movement but not for six months

• Because they believe there will be a downward price movement but are uncertain of the timing

• Because they believe there will be a downward price movement six months from now

10. What is a "straddle"?

Answers:

• Selling the underlying stock of an option

• Holding both a call and a put at the same strike price

• Watching the market to see what it will do

• Holding both a call and a put at different strike prices

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

Answers:

• 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

• Because they do not know the value of money in the long run

• Because they have less knowledge and do not know the potential for loss

• Because there are short term gains to be made

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

Answers:

• Because it is required by law

• Because it helps in tax planning

• Because it helps them decide which industry to invest in

• Because they can match their risk tolerance level with the types of stocks they are purchasing

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

Answers:

• 1

• 5

• 20

• 100

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

Answers:

• Sell call options

• Buy call options

• Do nothing

• Buy both calls and puts to neutralize their position

15. What is a "margin account"?

Answers:

• Borrowing money from friends to trade stocks with

• A stock trading account which allows the holder to borrow money from the broker

• An account used only for trading options

• An account which can be used only for trading large cap stocks

16. Which type of analysis relies on charting?

Answers:

• Fundamental

• Technical

• Both Fundamental and Technical

• Neither Fundamental nor Technical

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

Answers:

• Once per month

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

• Never. It does not apply to options.

• Possibly weekly

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

Answers:

• To look for options priced correctly

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

• To look for options which are not yet written on securities

• To look for opportunities to sell your options at less than you bought them for

19. What is meant by a covered call?

Answers:

• Buying a stock, and selling a call at the same time

• Buying a stock, and selling a put at the same time

• Selling stock options on securities which are not owned

• Buying stock options on securities which are not owned

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

Answers:

• When an investor sells a call option and purchases a put option

• When an investor purchases two call options at different prices

• When an investor owns both call and put stock options at the same stock price

• When an investor purchases two put options at different prices

21. What is the primary method to mitigate risk?

Answers:

• Diversifying investment holdings

• Day trading

• Purchasing only tech stocks

• Purchasing stock in the company you work for

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

Answers:

• High

• Moderate

• Varies indefinitely

• Low

23. When is the straddle trading strategy appropriate?

Answers:

• When the price may move by a small amount

• When an investor believes there will be a large decrease in the stock price

• When an investor believes there will be a large increase in the stock price

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

24. What is a "call"?

Answers:

• An options contract which gives the holder the right to buy a stock at a predetermined price

• A stock which is long

• An options contract which gives the holder the right to sell a stock at a predetermined price

• Placing an order to buy options

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

Answers:

• No, they are a commission broker.

• No, they are a trader looking for short term gains.

• Yes, they are investing their money.

• Yes, they are an options investor.

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

Answers:

• Selling two options either put or call

• Complex trading strategy involving buying two calls and selling two calls

• Buying two put options at different strike prices

• Selling only call options on stock you own

27. What is "strike price"?

Answers:

• The price of the option

• The price at which the trader hopes to sell the option

• The current trading price of the option

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

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

Answers:

• Options that trade in a very narrow band

• Options which have completely unpredictable pricing

• Options which have broken the trend

• Options with near term expiration dates

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

Answers:

• Selling options which expire in the following month

• Selling options which expire one year from now

• Selling call options with an expiration of two months from now without owning the underlying stock

• Selling call options with an expiration of one month from now without owning the underlying stock

30. Why would a trader liquidate a portfolio?

Answers:

• Because it is illegal to hold it too long

• To avoid being labeled as a day trader

• Because he has made too much money already

• Because he is no longer interested in the classification of stocks

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

Answers:

• Because it makes it easier to manage

• Because the only way to classify options is by expiration

• Because options expiring in the near term need to be monitored more actively

• Because it reduces the tax obligation

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

Answers:

• When expectations are that the market will fall

• When there is a temporary increase in stock prices

• When there is a temporary decrease in stock prices

• When expectations are that the market will rise

33. What is a sideways chart?

Answers:

• When a stock price varies drastically

• When a stock price moves within a relatively narrow band

• When a stock is losing value quickly

• When a stock has just had news come out

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

Answers:

• Because it creates an income stream

• Because it lowers risk in investment

• Because it creates a return on investment

• All of the above

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

Answers:

• It lowers the trader's tax obligations.

• It makes it easier to trade and profit.

• It takes away all risk.

• Goals can be set for each portfolio and tracked separately.

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

Answers:

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

• The stocks you purchase are guaranteed to increase.

• It makes for a zero sum game, with no losses or profits.

• Risk is assigned to someone else.

37. What is portfolio management?

Answers:

• Having a suite of investments to reach a goal while minimizing risk

• Buying shares all in one industry

• Actively trading stocks in your portfolio

• Selling off securities which are not performing

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

Answers:

• Neither one can accurately predict future stock price movements.

• Both help people make money, the question is which one helps them make more money.

• The numbers needed are not readily available.

• There are other strategies which work better.

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

Answers:

• Because new year means companies can restart and forget the past

• Because management is always more driven

• Because the year end sales typically bolster profits and increase demand

• Because employee cuts are made reducing expenses typically after the holidays

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

Answers:

• Because it requires too much time to manage

• Because they are completely different investment perspectives

• Because taxes would be excessive

• Because it would be too difficult to earn a return on any one portfolio

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

Answers:

• Trading risky securities with margin

• Short selling stock

• Buying out of the money call options with expirations in the near future

• Not using margin to trade with

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

Answers:

• Buying a put option for a stock which is currently owned

• Buying a call option for a stock which is currently owned

• Short selling stocks

• Selling put options for a stock which is currently owned

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

Answers:

• By the tax laws which apply

• By the number of shares outstanding

• By the time the securities were purchased

• By the time horizon of the investments contained within it

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

Answers:

• Buying both call and put options on a variety of stocks

• Applying trading strategies

• Buying only call options on one stock

• Selling calls on a security which is owned

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

Answers:

• Daily

• Continuously, but not daily

• Yearly

• Never

46. What factors does technical analysis primarily rely on?

Answers:

• Financial reports

• Management reports

• Past price and volume

• Market indicators

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

Answers:

• When expectations are that the market will fall

• When there is a temporary increase in stock prices

• When there is a temporary decrease in stock prices

• When expectations are that the market will rise

48. What is an "option spread"?

Answers:

• The same as butterfly trading strategy

• Buying and selling options of two different companies

• Buying and selling stock options at different strike prices for the same security

• Selling call options on securities

49. What is a "put"?

Answers:

• Selling by an options contract holder of their contract

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

• Selling by a stock holder of their stock in order to buy options

• An options contract which gives the holder the right to buy the underlying stock at a predetermined price

50. What is the legal requirement regarding portfolios?

Answers:

• Investors are required by tax law to classify their investments into portfolios.

• Investors are required by the SEC to classify their investments into portfolios.

• Required by accounting laws

• There is no legal requirement to create portfolios.

51. What is a "strangle"?

Answers:

• Selling only call options

• Buying or selling a put and a call with different strike prices

• Buying a call and selling a put

• Buying two call options at different strike prices

52. What skills would technical analysis use primarily?

Answers:

• Scientific

• Mathematical

• Research

• English

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

Answers:

• The stock price does not reflect current market information.

• No one else has recognized the stock as a good investment.

• All stocks will increase in the long run.

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

54. What is meant "short selling"?

Answers:

• Selling less stock than is currently owned

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

• Buying call options on a security

• Buying put options on a security

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

Answers:

• Looking for arbitrage opportunities

• Looking to sell call options

• Trying to find brokerages that charge lower commission for their transactions

• Calculating the implied price of an option based on several factors

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

Answers:

• They are mutually exclusive, and an analyst would use one or the other, never both.

• They must both be used together.

• They can both be used to complement each other, but not together.

• They are very exclusive techniques that should both be avoided.

57. What happens when a trader uses a straddle?

Answers:

• They buy two call options at different prices.

• They buy two put options at different prices.

• They buy the stock and a call option.

• They buy a call and a put option at the same strike price.

58. What is the purpose of candlestick charting?

Answers:

• It tells the user exactly when to buy.

• It gives the trader something to do in their spare time.

• It is required in order to trade stock options.

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

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

Answers:

• Because each portfolio could be taxed separately

• Because each portfolio could contain one stock

• Because each portfolio would be set up to meet specific goals

• Because they can sell all the stocks within a portfolio more easily

60. What is the primary goal of technical analysis?

Answers:

• Identifying trends to predict near term price movements

• Helping build a retirement plan

• Identifying stocks with potential for large increases in the next two years

• Finding indications of interest rate direction

61. How is risk measured?

Answers:

• By classifying it into one of three levels of risk

• Individually, each investor assesses their own risk tolerance level

• As a letter; a,b,c or d

• Someone else assesses your risk level

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

Answers:

• The shorted options all have the same strike prices.

• It is another term for short selling stock.

• The shorted options have different strike prices, creating a stagger.

• It involves selling calls while buying calls at the same time.

63. What is candlesticking?

Answers:

• Selling stock options without owning the underlying stock

• Short selling stock

• A charting technique which shows price movements over time indicating the high and the low daily

• Owning several options of the same company

64. Which of the following is the most profitable?

Answers:

• Deep in the money call options

• Deep out of the money call options

• Slightly in the money call options

• Slightly out of the money call options

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

Answers:

• Because they believe the price will rise

• Because they don't really own the security

• Because they are writing naked calls

• Because they believe the security price will fall, creating profit from the calls

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

Answers:

• Short selling stock

• Selling naked put options

• Selling naked call options

• Selling covered call options

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

Answers:

• Because they cost money

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

• Because not enough data is available

• Because they are only for the wealthy

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

Answers:

• Only trading call options

• Only trading put options

• Always selling options instead of buying

• Placing a limit order

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

Answers:

• Owning an excessive amount of shares

• Selling stock options on a security

• Intention to hold a security for a long period of time

• Selling a stock without owning it

70. What is the "expiration date"?

Answers:

• The date on which the trader's license expires

• The date on which a broker's account expires

• The date on which the underlying stock no longer remains tradable

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

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

Answers:

• Because it is a good general policy

• Because it guarantees no losses

• Because it is required by tax law

• Because of the risky nature of stock options

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

Answers:

• Sell options of a security of which they do not own the underlying stock

• Buy both call and put options which help reduce the overall risk

• Sell call options on a security of which they own the underlying stock

• Do nothing and invest in foreign exchange

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

Answers:

• Give the options trader a specific guideline on what to buy

• Tell an options trader what market to trade in

• Tell the options trader if he should sell puts

• Calculate a price based on weighting potential outcomes

74. What is the offset to limiting downside?

Answers:

• Unlimited profits

• Often limited profits

• No profits

• Risky tax implications

75. What does heavy volume trading indicate?

Answers:

• That the expiration date is near

• That the current market price is wrong

• That insiders know something no one else does

• Typically that news has come out regarding the underlying stock

76. Which of the following would technical analysis include?

Answers:

• Company financials

• Market statistics

• Stock pricing

• Currency

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

Answers:

• Short selling stocks

• Long term returns over time

• Risky trading

• Short term returns

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

Answers:

• Purchasing only small cap stocks

• Purchasing stock options in three industries

• Purchasing stock options all in one industry

• Purchasing only options on blue chip stocks

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

Answers:

• Sell the option

• Buy offsetting put option

• Buy more of the option

• Depends on their tolerance level for risk and their strategy

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

Answers:

• That the price will move in a tight range, not varying much

• That they can sell the underlying stock for more than the option makes

• That the option will expire without selling

• That the price will move drastically in one direction, up or down

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

Answers:

• They start trading on margin.

• They withdraw their original capital and use only profits to trade with.

• They write naked call options.

• They short sell stocks with substantial risk.

82. How would an options investor diversify their portfolio?

Answers:

• By holding both call and put options

• By holding options with varying expiration dates

• By selling and buying options

• All of the above