Options Trading Basics

Questions and Answers

Which statement best describes being long on a call option?

You are the writer of the option.

You must buy the underlying asset if exercised.

You have the right to buy the underlying asset. (correct)

You are obligated to sell the underlying asset.

What does being short on a put option imply?

You are taker of an option to sell.

You can choose not to buy the underlying asset under any circumstances.

You have the right to sell the underlying asset.

You are obligated to buy the underlying asset if exercised. (correct)

Which of the following accurately defines being short on a call option?

You are the taker of the option to buy.

You have the right to sell the underlying asset.

You are obligated to sell the underlying asset if the option is exercised. (correct)

You must buy the underlying asset if exercised.

What rights does a long put option grant you?

The right to sell the underlying asset at a specified price. Signup and view all the answers

Which of the following describes the role of a writer in options trading?

They must fulfill the obligations of the contract if the option is exercised. Signup and view all the answers

Being long on a call means you are the taker of an option to ______ from the writer.

buy Signup and view all the answers

Being long on a put means you are the taker of an option to ______ to the writer.

sell Signup and view all the answers

As a short on a call, you are the writer of an option for someone to ______ from you.

buy Signup and view all the answers

When you are short on a put, you are the writer of the option for someone to ______ to you.

sell Signup and view all the answers

If you are long on a put, you have the option to ______ your asset.

sell Signup and view all the answers

Study Notes

Options Trading Basics

Long on Call:
- Refers to buying a call option, granting the holder the right to purchase the underlying asset at a predetermined price (strike price) before expiration.
- The writer (seller) of the call option is obligated to sell the underlying asset if the option is exercised.
Long on Put:
- Refers to buying a put option, giving the holder the right to sell the underlying asset at the strike price before expiration.
- The writer of the put option is obligated to buy the underlying asset if the option is exercised.
Short on Call:
- Involves writing (selling) a call option, thus taking on the obligation to sell the underlying asset if the option holder exercises the option.
- Potential loss is theoretically unlimited if the asset price rises significantly above the strike price.
Short on Put:
- Involves writing a put option, obligating the writer to purchase the underlying asset if the option holder decides to sell it.
- The risk is substantial if the underlying asset drops below the strike price, as the writer must buy it at the higher strike price.

Options Trading Basics

Long on Call:
- Refers to buying a call option, granting the holder the right to purchase the underlying asset at a predetermined price (strike price) before expiration.
- The writer (seller) of the call option is obligated to sell the underlying asset if the option is exercised.
Long on Put:
- Refers to buying a put option, giving the holder the right to sell the underlying asset at the strike price before expiration.
- The writer of the put option is obligated to buy the underlying asset if the option is exercised.
Short on Call:
- Involves writing (selling) a call option, thus taking on the obligation to sell the underlying asset if the option holder exercises the option.
- Potential loss is theoretically unlimited if the asset price rises significantly above the strike price.
Short on Put:
- Involves writing a put option, obligating the writer to purchase the underlying asset if the option holder decides to sell it.
- The risk is substantial if the underlying asset drops below the strike price, as the writer must buy it at the higher strike price.

Description

This quiz covers the fundamental concepts of options trading, including long and short positions on calls and puts. Test your understanding of what it means to be the taker or writer in options transactions. Ideal for beginners and those looking to refresh their knowledge.