Options Trading Strategies Quiz

The right to sell an asset at a predetermined price (exercise price).

Exercised only when asset price falls below the exercise price.

Either zero if the stock price (ST) is above the exercise price (X), or (X - ST) if the stock price is below the exercise price (ST < X).

Profit is calculated by subtracting the put's initial cost from the payoff at expiration.

The point where the option writer's profit is zero, offsetting the premium received when the option was written.

Mirror image of a call holder's payoff.

The current market price of the underlying stock

Predetermined price at which asset can be bought or sold.

An investment strategy that profits when the price of an asset increases. Examples include buying call options and writing put options.

An investment strategy that profits when the price of an asset decreases. Examples include buying put options and writing call options.

Buying a call option can be preferable to directly buying shares of stock when the investor believes the stock price will rise significantly, but wants to limit their potential losses. The call option allows them to profit from the upside potential without having to invest in the stock upfront.

A graphical representation of the potential profit or loss from an option strategy at its expiration. It shows the payoff for different possible stock prices.

A graphical representation of the actual profit or loss from an option strategy at its expiration. It considers both the payoff and the initial cost of the option.

Option strategies can be an alternative to directly buying or selling stocks because they offer leverage and control over the underlying stock without the full commitment of purchasing it.

A specific combination of buying or selling options that defines a particular investment approach.

The profit or loss at the expiration of an option, depending on the underlying stock price and the option's exercise price.

A strategy involving selling both a call and a put option on the same underlying asset with the same strike price and expiration date.

The payoff of a straddle is positive regardless of the stock price movement, except at the strike price where the payoff is zero. The payoff is maximized when the stock price moves significantly away from the strike price.

The profit of a straddle is the difference between the payoff and the initial cost of purchasing the call and put options. The profit is only positive if the stock price moves significantly away from the strike price, exceeding the initial cost.

While a straddle's payoff is always positive, it's only profitable if the stock price moves significantly above or below the strike price. To make a profit, the movement needs to cover the initial cost of buying both options. The risk lies in the potential for large losses if the stock price stays close to the strike price.

A combination of options where you buy two put options and one call option with the same strike price and expiration date.

A combination of options where you buy two call options and one put option with the same strike price and expiration date.

A combination of options where you use two or more call options or put options on the same underlying security, but with different strike prices or expiration dates.

A spread uses multiple options with different strike prices or expiration dates, while a straddle uses only one strike price and expiration date for both options.