Trading in the Congestion Phase Flashcards
In the congestion phase of the market, buying a call can be initiated at:
a) a double bottom
b) when the shortest time frame you are observing turns positive
c) when your technical indicators turn positive
d) all of the above
d) all of the above
In the congestion phase of the market, buying a put can be initiated at:
a) a double top
b) when the shortest time frame you are observing turns negative
c) when your technical indicators turn negative
d) all of the above
d) all of the above
In the congestion phase of the market, what is true about volatility?
a) It is low, as price is not moving more than +1/−1𝜎.
b) It is high, as there will be maximum uncertainty as to future price direction.
c) It is impossible to tell what volatility will be at any point in the market
cycle.
d) Volatility is not important in the congestion phase of the market.
c) It is impossible to tell what volatility will be at any point in the market
cycle.
In the congestion phase of the market, what is true about buying options
outright?
a) It is always dependent on the uncertainty in the market (volatility).
b) It is always a safe play, as the risk is limited and the reward is unlimited.
c) It should only be done in a low-volatility environment.
d) It should only be done in a high-volatility environment.
a) It is always dependent on the uncertainty in the market (volatility).
Buying calls in a rising volatility environment generally:
a) is not a good trade; if the market is rallying volatility will be dropping
b) can make money even if the price goes down slightly
c) is no longer a safe trade
d) none of the above
b) can make money even if the price goes down slightly
When should a bull credit spread (vertical) be initiated?
a) the market reaches a double bottom
b) your shortest technical indicator turns positive
c) volatility is dropping
d) both a and b
d) both a and b
A bull ATM credit spread (vertical) can make money even if:
a) the market remains at the same price
b) the market rallies
c) the market breaks slightly
d) all of the above
d) all of the above
A bear ATM credit spread (vertical) can make money even if:
a) the market remains at the same price
b) the market rallies slightly
c) the market breaks
d) all of the above
d) all of the above
What is true about a 60/40 bull credit spread?
a) It has the same reward as a 60/40 bear spread.
b) It has a greater reward than an ATM credit spread.
c) It can only make money if you are correct in predicting price.
d) All of the above are true.
d) All of the above are true.
A credit spread should never be used when:
a) volatility is rising
b) you can buy an outright option for the same risk
c) a credit spread can always be used in congestion
d) none of the above
c) a credit spread can always be used in congestion
When should profit be taken on a credit spread?
a) when price goes through the long strike
b) when price goes through the short strike
c) on any Friday
d) when it expires
d) when it expires
How can an ATM credit spread be defended?
a) Stop yourself out and reversing to the opposite credit spread.
b) Turn it into an iron condor.
c) You have limited risk, so don’t defend it.
d) None of the above is true.
b) Turn it into an iron condor.
If you turn an ATM credit spread into an iron condor, which of the following is
true?
a) You can never lose more than the net credit no matter what price does.
b) You will cash one side of the trade if you don’t readjust.
c) You can cash both sides of the trade if price expires between your short
strikes.
d) Both b and c are true.
d) Both b and c are true.
A bullish risk reversal should be initiated in congestion when:
a) the market is within 5 percent of a double bottom
b) the shortest time frame you are observing turns positive
c) your technical indicators turn positive
d) all of the above
d) all of the above
A bearish risk reversal should be initiated when:
a) the market is within 5 percent of a double top
b) the shortest time frame you are observing turns bearish
c) your technical indicators turn negative
d) all of the above
d) all of the above
How does a bullish risk reversal resemble a call?
a) Both have unlimited reward and limited risk.
b) Both should be initiated in a low-volatility environment.
c) Both can make money even if the price goes slightly lower.
d) Both b and c.
a) Both have unlimited reward and limited risk.
How does a bullish risk reversal in congestion resemble a put?
a) Both have unlimited reward and limited risk.
b) Both should be initiated in a high-volatility environment.
c) Both can make money even if the price goes slightly lower.
d) Both b and c.
b) Both should be initiated in a high-volatility environment.
What is true about rolling up a bullish risk reversal?
a) It should be rolled up if the underlying asset begins to break.
b) It should be rolled up if the long strike goes at least to an ATM +2.
c) You should never let the winner run.
d) You don’t need to roll up if you want to accept the intratrade risk.
a) It should be rolled up if the underlying asset begins to break.
What is true about rolling down a bearish risk reversal?
a) It should be rolled down if the underlying asset begins to break.
b) It should be rolled down if the long strike goes at least to an ATM −2.
c) It should be rolled down if the volatility suddenly rises.
d) You don’t need to roll down if you want to accept the intratrade risk.
b) It should be rolled down if the long strike goes at least to an ATM −2.
When should you roll back a winning bullish risk reversal?
a) anytime the long strike goes to ATM +2
b) when you reach a double top
c) on Friday, before the close of expiration
d) never
b) when you reach a double top
When should you roll back a winning bearish risk reversal?
a) anytime, as long as the market is not rallying
b) when you reach a double bottom
c) on Friday, before the close of expiration
d) only a and b
c) on Friday, before the close of expiration
A 1 × 2 bullish backspread works best:
a) at double bottoms
b) at double tops
c) in a low-volatility environment
d) in a high-volatility environment
c) in a low-volatility environment
A 1 × 2 bearish backspread works best:
a) at double tops
b) when the market is rallying
c) in a low-volatility environment
d) in a high-volatility environment
c) in a low-volatility environment
Splitting strikes in a 1 × 2 backspread:
a) increases risk
b) decreases risk
c) has greater profit potential than touching strikes
d) works best in a low-volatility environment
c) has greater profit potential than touching strikes
A credit spread:
a) sells air and therefore has unlimited risk
b) has little upside in relation to its risk
c) is selling one option and buying another
d) both a and b
a) sells air and therefore has unlimited risk
