Stock Market Options Quiz
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Questions and Answers

The seller of a put option gains if the price of the underlying asset:

  • Does not change
  • Increases (correct)
  • Both Increases and Does Not Change
  • Decreases

    • On the National Stock Exchange, the opening day of the April futures series is the:

  • Last Friday of April month
  • Last Friday of February month
  • Last Friday of March month (correct)
  • Last Friday of January month

    • What action is taken when a client defaults on payment in respect to Daily Settlement?

  • The contract is closed out (correct)
  • The client can give a bank guarantee within 2 working days
  • The client is given 2 days to clear the payments
  • The broker pays and the client refunds in 7 working days

    • If all things remain constant throughout the contract period, the option price will always:

    <p>Either Rise or Fall</p> Signup and view all the answers

    Impact cost in a market is typically low when:

    <p>The trading volume is low</p> Signup and view all the answers

    Operational risks include losses due to:

    <p>Inadequate disaster recovery planning</p> Signup and view all the answers

    According to the J.R.Verma Committee recommendations, volatility should be calculated based on:

    <p>Standard Deviation of logarithmic daily returns</p> Signup and view all the answers

    When a trader sells a lower strike price CALL option and buys a higher strike price CALL option, this strategy is called:

    <p>Bearish Spread</p> Signup and view all the answers

    What is the intrinsic value of an Out of the Money option?

    <p>Zero intrinsic value</p> Signup and view all the answers

    What is Rho in options trading?

    <p>Is the change in option price given a one percentage point change in the risk-free interest rate</p> Signup and view all the answers

    What characterizes an Over the Counter Option?

    <p>A private contract</p> Signup and view all the answers

    What is required of an option seller due to the potential risk involved?

    <p>Margins</p> Signup and view all the answers

    What does a covered call strategy entail?

    <p>Generating extra income from existing holdings in the cash market</p> Signup and view all the answers

    If a trader engages in buying a put option with a higher strike price and selling a put option with a lower strike price, what is this strategy called?

    <p>Bearish Spread</p> Signup and view all the answers

    What is it called when a trader buys both a call and a put option with the same strike price and expiry?

    <p>Long Straddle</p> Signup and view all the answers

    Margins in trading are collected on what basis?

    <p>Daily basis</p> Signup and view all the answers

    What is the characteristic of an 'In the Money' option?

    <p>It has intrinsic value</p> Signup and view all the answers

    What is the outcome for a seller of a Call option?

    <p>They risk unlimited losses</p> Signup and view all the answers

    A naked PUT option seller is considered to be what in the market?

    <p>Bullish and receives the premium</p> Signup and view all the answers

    How is the profit or loss calculated when selling a PUT option?

    <p>Premium received minus market price</p> Signup and view all the answers

    What does the term 'Delta' measure in options trading?

    <p>Sensitivity of the option value to price changes in the underlying asset</p> Signup and view all the answers

    What happens to the Mark to Market margin when you are long in futures and the price increases?

    <p>It increases your account balance</p> Signup and view all the answers

    Which tax applies to equity transactions on a recognized stock exchange?

    <p>Securities Transaction Tax</p> Signup and view all the answers

    What value is considered as the intrinsic value of an 'In the Money' option?

    <p>Market price minus exercise price</p> Signup and view all the answers

    What should Kailash do to protect himself from losing more than Rs. 4000 on his long position of Reliance Industries shares?

    <p>Place a stop loss sell order for 200 shares at Rs. 830 per share</p> Signup and view all the answers

    What is the intrinsic value of a CALL option when it is considered In the Money?

    <p>The amount the option is In the Money</p> Signup and view all the answers

    What is the correct classification of a contract where a farmer sells sugarcane to a factory for future delivery?

    <p>Forward Contract</p> Signup and view all the answers

    How did the investor achieve a profit of Rs. 25000 after taking a short position on Nifty?

    <p>Selling 10 lots at 5450</p> Signup and view all the answers

    At what price does exercise settlement for option contracts take place?

    <p>Closing price of the underlying</p> Signup and view all the answers

    Will Mr. Mohit have to pay Securities Transaction Tax (STT) if he buys 3 Call options at a premium?

    <p>Yes</p> Signup and view all the answers

    Which strike price options can protect an investor’s portfolio valued at Rs. 5 lacs, with a desired protection against a fall of more than 10%?

    <p>4900</p> Signup and view all the answers

    What classification does a Nifty 5950 call option with a spot value of 5880 and a premium of Rs 12 fall under?

    <p>Out of the Money</p> Signup and view all the answers

    What does a naked call option imply about the writer's position?

    <p>The writer does not own the underlying asset</p> Signup and view all the answers

    Which entity is responsible for deciding the daily settlement prices of equity derivatives?

    <p>The Clearing Corporation</p> Signup and view all the answers

    What is the nature of the ASK price in relation to the bid price?

    <p>Always greater than the bid price</p> Signup and view all the answers

    What does a Bull Spread strategy involve?

    <p>Buying a call option with a lower strike price and selling another call option with a higher strike price</p> Signup and view all the answers

    How does the maximum possible loss for an option buyer relate to potential profits?

    <p>Loss is limited to the premium paid with potential for unlimited profit</p> Signup and view all the answers

    Which document must be provided to a person opening a Trading Account?

    <p>Risk disclosure document</p> Signup and view all the answers

    In a futures contract, how can you close a long or short position?

    <p>By initiating a reverse trade</p> Signup and view all the answers

    What should a client registration form contain?

    <p>Investment objectives, background, and beneficial identity</p> Signup and view all the answers

    Study Notes

    Put Options

    • The seller of a put option profits when the price of the underlying asset increases or remains unchanged.
    • Maximum loss for a put option buyer is the premium paid.

    Futures and Options Trading

    • The opening day for the April series of index futures on the National Stock Exchange is the last Friday of March.
    • If a client defaults on daily settlement payments, contracts are closed out.
    • Margin collection for trading is done on a daily basis.

    Option Pricing and Value

    • An out-of-the-money option has zero intrinsic value.
    • Rho measures option price sensitivity to changes in risk-free interest rates.
    • The intrinsic value of a call option equals the difference between market price and exercise price when in the money.

    Risk Management and Strategies

    • A bullish spread involves buying a lower strike call option and selling a higher strike call option.
    • A protective put strategy is used to safeguard against potential losses in stocks the trader owns.

    Option Characteristics

    • The time value of options is higher for at-the-money options.
    • Over-the-counter options are private contracts that are not standardized.
    • The maximum loss for option sellers can be unlimited, hence they need to pay margins.

    Miscellaneous Financial Concepts

    • Tick size is determined by regulations set by exchanges.
    • The ASK price is always greater than the bid price in trading scenarios.

    Tax and Regulations

    • Securities Transaction Tax applies to equity transactions done on recognized stock exchanges.
    • Clients must receive a risk disclosure document when opening a trading account.

    Investor Protections

    • To limit potential losses, investors can set stop-loss orders based on their risk tolerance levels.
    • The daily settlement prices for equity derivatives are determined by the clearing corporation.

    Market Mechanics

    • Volume in futures markets is enhanced by the presence of speculators, creating liquidity.
    • Short selling in futures requires strategic timing to realize profits.

    Limiting Losses in Trading

    • An investor wanting to protect a portfolio can find put options at varying strike prices to mitigate risk during market downturns.

    Summary of Options

    • The maximum possible loss for the option buyer equals the premium paid.
    • The ability to close long or short positions through a reverse trade is a fundamental feature of futures contracts.

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    Description

    Test your knowledge on stock market options and futures with this quiz featuring questions on put options and settlement practices in the National Stock Exchange. Understand how price changes affect option sellers and gain insights into opening days for index futures. Perfect for finance students and professionals alike!

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