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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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.

An investor buying a 3-month ATM call option and selling a 1-month ATM call option in the same underlying name, is expecting

A price decline in the underlying stock in the next one month

A price increase in the underlying stock in the next one month

Implied volatility in the underlying to increase after one month

Implied volatility in the underlying to decrease after one month

A common application of the risk-reversal trade (long an OTM put, short an OTM call) is to hedge an existing long exposure. The investor gives up some of the upside in exchange for downside protection. Which of the following is true?

The cost of the risk-reversal is highly sensitive to the overall level of volatility, since it is effectively a long volatility play.

The cost of the risk-reversal is highly sensitive to skew, since the two strike prices are quite far apart.

The cost of the risk-reversal is not sensitive to skew since the put and the call are both out-of-the-money.

For an investor already long the stock, the risk-reversal results in a flat position (no exposure to stock movements).

An investor owning MSFT stock enters into a 'costless collar' (costless risk reversal) by buying out-of-the-money puts and selling out-of-the-money calls on all his MSFT shares. Considering absolute returns (no benchmark), which of the following is false?

The investor is fully exposed to the stock between the strike prices of the put and the call.

The investor is protected against large moves down in the stock.

The investor gives up some of the upside.

The investor is best off if the puts finish in-the-money and the calls finish out-of-the-money.

Which investor is most negatively affected by time decay? An investor who is

Short a 3-month ATM option

Short a 1-month slightly OTM option

Long a 3-month ATM option

Long a 1-month slightly OTM option