Lesson 3: Options

Question 1

a contract that gives the holder the choice to buy or sell underlying assets, at a set price, and by a set date

Answer 1

option

Question 1

an options contract to BUY a stock at a set price by a set date

Answer 1

call

Question 2

an options contract to SELL a stock at a set price by a set date

Answer 2

put

Question 3

seconds to minutes

Answer 3

scalp

note: the quickest type of trade

Question 4

minutes to hours

Answer 4

day trading

Question 5

overnight to day to weeks

Answer 5

swing

Question 6

the current highest price a buyer is willing to pay for an option

Answer 6

bid

Question 7

weeks to months

Answer 7

leap

note: the longest type of trade

Question 8

the current lowest price the seller is willing to accept for an option

Answer 8

ask

Question 9

the amount of stock purchased at a specific price

Answer 9

bid size

Question 10

the amount of stock sold at a specific price

Answer 10

ask size

Question 11

the number of shares traded over the course of the day

Answer 11

volume

Question 12

the price at which the put or call option can be exercised

Answer 12

strike price

Question 13

the amount the option price is expected to move based on a $1 change in the stock price

Answer 13

delta

Question 14

the rate of change in the delta for each $1 change in the stock price

Answer 14

gamma

Question 15

the time decay of an option

the amount an option will lose each day closer to expiration

Answer 15

theta

Question 16

the amount an option’s price changes per 1% change in the implied volatility

Answer 16

vega

Question 17

the sensitivity of an option or options portfolio to a change in interest rate

Answer 17

rho

Question 18

total number of open options or future contracts that have not been settled for an asset

Answer 18

open interest

Note: open interest keeps track of every open position in a particular contract, rather than tracking the total volume traded in it

Question 19

used to estimate the future volatility of an asset’s price, as implied by the market prices of options on that asset

reflects the market’s expectations of how much the asset’s price will move over a certain period of time

Answer 19

implied volatility

Note:
higher implied volatility = anticipates significant price swings
lower implied volatility = suggests more stable prices

Question 20

ATM

Answer 20

“at the money”

Note: recommended to trade “at the money”; tends to have the best spread

Question 21

OTM

Answer 21

“out of the money”

Question 22

ITM

Answer 22

“in the money”

Question 23

difference between the bid and ask

Answer 23

“the spread”

Note: you don’t want the spread to be too big; tighter spread = good

Question 24

True or False: Generally, the closer to your expiration date, the less your option is going to be worth

Answer 24

True

Question 25

"making money on the way up" characterizes _______ (calls/puts)

Answer 25

calls

Question 26

"making money on the way down" characterizes _______ (calls/puts)

Answer 26

puts