Trading in the Congestion Phase

Question 1

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

Answer 1

d) all of the above

Question 2

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

Answer 2

d) all of the above

Question 3

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.

Answer 3

c) It is impossible to tell what volatility will be at any point in the market
cycle.

Question 4

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.

Answer 4

a) It is always dependent on the uncertainty in the market (volatility).

Question 5

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

Answer 5

b) can make money even if the price goes down slightly

Question 6

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

Answer 6

d) both a and b

Question 7

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

Answer 7

d) all of the above

Question 8

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

Answer 8

d) all of the above

Question 9

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.

Answer 9

d) All of the above are true.

Question 10

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

Answer 10

c) a credit spread can always be used in congestion

Question 11

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

Answer 11

d) when it expires

Question 12

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.

Answer 12

b) Turn it into an iron condor.

Question 13

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.

Answer 13

d) Both b and c are true.

Question 14

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

Answer 14

d) all of the above

Question 15

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

Answer 15

d) all of the above

Question 16

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.

Answer 16

a) Both have unlimited reward and limited risk.

Question 17

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.

Answer 17

b) Both should be initiated in a high-volatility environment.

Question 18

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.

Answer 18

a) It should be rolled up if the underlying asset begins to break.

Question 19

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.

Answer 19

b) It should be rolled down if the long strike goes at least to an ATM −2.

Question 20

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

Answer 20

b) when you reach a double top

Question 21

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

Answer 21

c) on Friday, before the close of expiration

Question 22

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

Answer 22

c) in a low-volatility environment

Question 23

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

Answer 23

c) in a low-volatility environment

Question 24

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

Answer 24

c) has greater profit potential than touching strikes

Question 25

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

Answer 25

a) sells air and therefore has unlimited risk