Trading in the Trending Phase

Question 1

In the trending phase of the market, when can buying a call be initiated?

a) Buy anytime the technical signals are bullish.
b) Buy when the shortest time frame you are observing turns positive.
c) Buy when the market breaks out above congestion.
d) All of the above are correct.

Answer 1

d) All of the above are correct.

Question 2

In the trending phase of the market, when can buying a put be initiated?

a) Buy anytime technical signals are bearish.
b) Buy when the shortest time frame you are observing turns negative.
c) Buy when your technical indicators turn negative.
d) All of the above are correct.

Answer 2

d) All of the above are correct.

Question 3

In the trending phase of the market, what will volatility be?

a) It will be low, as price is not moving between +/−2, 3𝜎.
b) It will be high if the market is rallying.
c) It is impossible to predict what volatility will be at any point in the market
cycle.
d) None of the above is correct.

Answer 3

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

Question 4

In the trending phase of the market, what is true about buying options outright?

a) It is the first choice of most traders.
b) It is usually a safe bet, as the risk is limited and the reward is unlimited.
c) It should only be done in a low-volatility environment.
d) It is best in a rising volatility environment.

Answer 4

d) It is best in a rising volatility environment.

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 breaks out above double tops.
b) Your shortest technical indicator turns positive.
c) Volatility is dropping.
d) Both a and b are correct.

Answer 6

d) Both a and b are correct.

Question 7

In a trending market 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

In a trending market 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

In a trending market, a 60/40 bull credit spread:

a) has more reward than a 60/40 bear spread
b) has a greater reward than an ATM credit spread
c) can only make money if you are correct in predicting price
d) only b and c

Answer 9

d) only b and c

Question 10

In a trending market, when should you not use a bullish credit spread:

a) when volatility is rising
b) when you can buy an outright option for the same risk
c) a credit spread can always be used in any market condition
d) all of the above

Answer 10

c) a credit spread can always be used in any market condition

Question 11

In a trending market, when can price profit be taken on a credit spread?

a) when price goes through the long strike
b) when your shortest-term signal gives you a reversal
c) on any Friday
d) when it expires

Answer 11

b) when your shortest-term signal gives you a reversal

Question 12

In a trending market, how can an ATM credit spread be defended?

a) Stop yourself out and reverse to the opposite credit spread.
b) Turn it into an iron condor.
c) You have limited risk; don’t defend it.
d) None of the above is correct.

Answer 12

b) Turn it into an iron condor.

Question 13

In a trending market, if you turn an ATM credit spread into an iron condor,
you can:

a) never lose more than the net credit no matter what price does
b) cash one side of the trade if you don’t readjust
c) cash both sides of the trade if price expires between your short strikes
d) both b and c

Answer 13

d) both b and c

Question 14

During a trending market, a risk reversal should be initiated:

a) when the shortest time frame you are observing turns bearish
b) when the shortest time frame you are observing turns positive
c) when your technical indicators turn positive
d) all of the above

Answer 14

d) all of the above

Question 15

A bullish risk reversal resembles a call in that:

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 15

a) both have unlimited reward and limited risk

Question 16

A bearish risk reversal in a trending market resembles a put in that:

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 16

a) both have unlimited reward and limited risk

Question 17

In a trending market, when should a bullish risk reversal be rolled up?

a) The underlying asset begins to break.
b) The long strike goes at least to an ATM +2.
c) Never let the winner run.
d) You don’t need to roll up if you want to accept the intratrade risk.

Answer 17

b) The long strike goes at least to an ATM +2.

Question 18

When should a bearish risk reversal be rolled down?

a) The underlying asset begins to break.
b) The long strike goes at least to an ATM −2.
c) The volatility suddenly rises.
d) You don’t need to roll down if you want to accept the intratrade risk.

Answer 18

b) The long strike goes at least to an ATM −2.

Question 19

In a trending market, 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 19

c) on Friday before the close of expiration

Question 20

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 20

c) on Friday, before the close of expiration

Question 21

In a trending market, when does a 1 × 2 bullish backspread work best?

a) if the trend continues in the direction in which you initiated the trade
b) if both a and c conditions are met
c) if it is initiated in a low-volatility environment
d) if it is initiated in a high-volatility environment

Answer 21

b) if both a and c conditions are met

Question 22

During a trending market, 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 22

c) in a low-volatility environment

Question 23

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 23

a) increases risk

Question 24

In a trending market, rolling up a bullish 1 × 2 backspread:

a) decreases intratrade risk
b) is not necessary if you are not concerned about intratrade risk
c) should only be done in a low-volatility environment
d) only a and b

Answer 24

d) only a and b

Question 25

In a bearish trending market, rolling back a 1 × 2 bearish backspread:

a) is not necessary if you want to take profit
b) should be done on Friday
c) decreases intratrade risk
d) can be done at anytime

Answer 25

b) should be done on Friday