Options Knowledge Quiz – QuantNet Forms

Welcome to the Options Knowledge Quiz. You have 20 minutes to complete the quiz. You will receive an email with your result and the correct answers at completion.

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You are directionally neutral, but firmly believe that over the next three months, the S&P 500 will be less volatile and will remain in a tighter trading range than most other investors believe. To act on this view, you should:

Buy an at-the-money call, sell an at-the-money put.

Buy an at-the-money call, buy an at-the-money put.

Sell an at-the-money call, sell an at-the-money put.

Sell an at-the-money call, buy an at-the-money put.

Theta measures the amount by which an option's time value decays every day. All else equal, which option would have the largest theta?

A short-dated option with a delta of 0.5

A short-dated option with a delta of 1

A long-dated option with a delta of 0.5

A long-dated option with a delta of 1

A client who is bullish the S&P 500 index is debating between buying ATM calls and buying an ATM call spread (long ATM call, short OTM call) on a larger notional. The option premium is the same for the two strategies. Which of the following is true?

The call spreads outperform the ATM calls for very low future values of the S&P 500.

The call spreads outperform the ATM calls for some but not all of the region between the two strike prices of the call spread.

The call spreads outperform the ATM calls between the two strike prices of the call spread, but the ATM call outperforms above that.

Even above the higher strike price (the strike of the OTM option), there is a region in which the call spreads will outperform the ATM calls.

Equity options usually exhibit a 'skew' with Black-Scholes implied volatilities higher for low-strike options than for high-strike options. In the presence of a steep skew, is it possible for a 10% out-of-the-money put to trade for more than an otherwise-identical 5% out-of-the-money put?

Yes, this happens quite often, and simply reflects risk-aversion in the market.

Yes, but this happens very rarely (only in crises such as October 1987, or September 2001).

Yes, this is possible, but would require a skew steeper than we have ever seen before.

No, this is impossible based on arbitrage arguments.

Suppose you buy a three-month call option on 100 shares of Coca-Cola (KO) at a strike price of $55 (with spot equal to $53). One month later, spot is again $53, and interest rates are unchanged. Assume zero dividends or corporate actions. Which of the following is true?

If implied volatility has increased, then the option must be worth more than when you purchased it.

If the option is worth more than when you purchased it, implied volatility must have increased.

The option must be worth less than when you purchased it, because of time decay.

The option must be worth the same as when you purchased it, since it is still ""equally"" out of the money."