Module 5: Understanding Options (The Basics Before Trading Them)

Question 1

Question: What is an Option?

Answer 1

Answer: An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price before a set expiration date.

Question 2

Question: What is the difference between buying a Call and buying a Put?

Answer 2

Answer:

Call Option: Gives the holder the right to buy a stock at a specific price before expiration.

Put Option: Gives the holder the right to sell a stock at a specific price before expiration.

Question 3

Question: What is a Strike Price in options trading?

Answer 3

Answer: The strike price is the price at which the option holder can buy (for calls) or sell (for puts) the underlying asset.

Question 4

Question: What is an Expiration Date in options trading?

Answer 4

Answer: The expiration date is the last day an option contract can be exercised before becoming worthless.

Question 5

Question: What are the Greeks in options trading?

Answer 5

Answer: The Greeks measure different risks in options pricing:

Delta: Measures price sensitivity to the underlying asset.

Theta: Measures time decay.

Gamma: Measures the rate of change of Delta.

Vega: Measures sensitivity to volatility.

Question 6

Question: What happens when an option expires?

Answer 6

Answer: If an option expires in the money (ITM), it may be exercised or assigned. If it expires out of the money (OTM), it becomes worthless.

Question 7

Question: What is Implied Volatility in options?

Answer 7

Answer: Implied volatility represents the market’s expectations of future price movement for the underlying asset.

Question 8

Question: What is a Covered Call?

Answer 8

Answer: A covered call is an options strategy where an investor sells a call option while owning the underlying stock to generate additional income.

Question 9

Question: What is a Cash-Secured Put?

Answer 9

Answer: A cash-secured put is a strategy where an investor sells a put option while having enough cash on hand to buy the stock if assigned.

Question 10

Question: What are common mistakes beginner options traders make?Answer: Overleveraging, failing to understand time decay, ignoring implied volatility, and trading options without a strategy.

Answer 10

Answer: Overleveraging, failing to understand time decay, ignoring implied volatility, and trading options without a strategy.