The Option Chain

Question 1

An option chain resembles:

a) a standard bell-shaped curve
b) a triangle breakout pattern
c) a trending pattern
d) none of the above

Answer 1

a) a standard bell-shaped curve

Question 2

What is true about the 40 delta call and the 40 delta put?

a) It is approximately the same premium.
b) The 40 delta call will always have more premium.
c) They have no correlation, as one is a put and the other a call.
d) None of the above

Answer 2

a) It is approximately the same premium.

Question 3

As air goes into the option chain (balloon):

a) it will have the greatest increase in the ATM
b) it will spill into all of the strikes
c) it will have no effect on the way out-of-the-money strikes
d) both a and b

Answer 3

d) both a and b

Question 4

The deferred serial will always have:

a) more air in the balloon as it has more uncertainty
b) more air in the out-of-the-money options
c) parity options and teenies
d) all of the above

Answer 4

d) all of the above

Question 5

What will happen if volatility doubles in the expiring month?

a) The at-the-money options will double in price.
b) The differed serial expirations will double.
c) There will no longer be parity options.
d) Volatility cannot double in the front month.

Answer 5

a) The at-the-money options will double in price.

Question 6

What is true about in-the-money options?

a) They expire in the money.
b) They will have no premium at expiration.
c) They have intrinsic value at expiration.
d) It cannot be determined from this information.

Answer 6

b) They will have no premium at expiration.

Question 7

An expiring option can:

a) never have more premium than a differed option at the same strike price
b) always be exercised
c) be assigned
d) all of the above

Answer 7

d) all of the above

Question 8

A lower-priced stock can never have:

a) more premium than a higher-priced stock
b) more volatility than a higher-priced stock
c) more price movement than a higher-priced stock
d) none of the above

Answer 8

d) none of the above - supply and demand determine premium

Question 9

The Black–Scholes model is designed to:

a) predict future price movement
b) react to future price movement
c) price supply and demand for options
d) none of the above

Answer 9

c) price supply and demand for options

Question 10

What does the Black–Scholes model ensure?

a) The underlying asset will be fairly priced.
b) The option chain will have liquidity.
c) The options will be fairly priced.
d) The at-the-money option will have the most air.

Answer 10

d) The at-the-money option will have the most air.