Hey, if you want to “call” yourself the best, then we think you have to “put” yourself to the test by taking our Options Trading quiz!

Answer these 10 questions correctly, and you may indeed have what it takes to be considered a top options trader. But even if you come up short on a few (or more) of these questions, learning the answers will teach you a little something. More importantly, the valuable knowledge you gain may come in handy when constructing your next winning trades.

So, if you’re ready to take the test, let’s get started!

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Question 1

Which of the following are benefits of writing options?A) You get paid potential profits up front in the form of the premium B) If the option expires out of the money, no one will want to exercise the contract and you will keep your entire premium C) As time value melts, the decline in the option’s value reduces your liability and risk as the option’s seller D) You can close your trade at any time E) All of the above

Question 2

True or False: A “short squeeze” happens when the price of a stock falls quickly, prompting shorts to run and “cover,” which simply means they must sell the stock in the open market to repay their margin loans.

Question 3

Which of the following are characteristic of a head-and-shoulders top chart pattern? A) It’s considered a bearish signal B) It’s considered a bullish signal C) It indicates a possible reversal of the current uptrend to a downtrend D) It indicates a possible reversal of the current downtrend to an uptrend E) A & C F) B & D

Question 4

True of False: During earnings season, a winning strategy is to buy calls on stocks of the companies that report better-than-expected earnings, and buy puts in companies that miss consensus earnings estimates.

Question 5

Bear-call spreads:A) Are generally used when you expect that the underlying stock, index or commodity will decline in price B) Are generally used when you expect that the underlying stock, index or commodity will increase in price C) Work by selling call options at a particular strike price while also purchasing an equal number of calls at a higher strike price as a hedge in the same transaction D) Work by selling put options at a particular strike price while also purchasing an equal number of puts at a higher strike price as a hedge in the same transaction E) Both A& C F) Both B & D

Question 6

The maximum risk in a short put is:A) Unlimited B) Equal to the price of the stock minus the premium received C) Equal to the price of the stock plus the premium received D) None of the above

Question 7

A long strangle is an options strategy consisting of:A) Selling a call and selling a put B) Buying a call and selling a put C) Buying a call and buying a put D) None of the above E) All of the above

Question 8

True of false: Credit spreads work by simultaneously writing (or selling) a call or put option, and buying the same type of option with a lower strike price on the same stock with the same expiration date.

Question 9

The following are characteristics of vertical spreads:A) They are non-directional strategies B) They are only used as bullish strategies C) Bull vertical spreads can be constructed only with calls D) All of the above E) None of the above

Question 10

An iron condor is:A) A spread trade used when the market is moving decidedly higher B) A spread trade used when the market is moving decidedly lower C) A spread trade used during a directionless market environment D) A 1980s heavy metal band

So, How Did You Do?

Question 1: E – All of the aforementioned are benefits of writing options. This strategy is great for generating income in a trading portfolio, and the best part is that you open the trade by collecting money up front, rather than laying money out. Question 2: False – A “short squeeze” happens when the price of a stock rises quickly, prompting shorts to run and “cover,” which simply means they must buy the stock in the open market to repay the shares they have borrowed on margin. Question 3: E – A head-and-shoulders top is considered a bearish signal. It indicates a possible reversal of the current uptrend to a new downtrend. The head-and-shoulders top is an extremely popular pattern among traders because it’s one of the most reliable of all formations. However, it’s not an easy one to spot. Learn how to identify a head-and-shoulders top. Question 4: False – Usually, the key to whether a stock goes up or down after its earnings announcement is not contingent upon that company beating or missing the consensus Wall Street earnings estimates. A more important factor is the so-called “whisper number” — the off-the-record earnings-per-share (EPS) estimate that Wall Street professionals come up with (and perhaps even share with their favored clients).

Answers (cont’d)

Question 5: E – The phrase “call option” makes most investors think of a stock on the rise, which, of course, is almost always correct — but bear-call spreads provide an exception. As the “bear” part of the name implies, a bear-call spread is a great option strategy to use when you expect that the underlying stock, index or commodity will decline in price. The strategy works by selling call options at a particular strike price while also purchasing an equal number of calls at a higher strike price as a hedge in the same transaction.Question 6: B – Investors will often avoid naked options trading because they believe that the strategy exposes them to unlimited risk, which is theoretically true with a short call, but is not the case with a short put. In fact, the maximum risk in a short put is equal to the price of the stock minus the premium received. That is the same risk you are exposed to in a covered call.Question 7: C – A long strangle is a unique options spread strategy, as spreads are typically designed to cap both your downside and your upside potential. But the long strangle — in which you purchase a call and a put — can yield unlimited profit if there are large movements in the price of the underlying asset in the near term, regardless of the direction the stock is trading in. When you put on a strangle, you are betting on the stock making a big move, but you don’t really have to be concerned with which direction because the long call would profit from an upward move and the long put would profit from a downward one.

Answers (cont’d)

Question 8: True – Credit spreads involve the simultaneous writing (or selling) of a call or put option, and the buying the same type of option with a lower strike price on the same stock with the same expiration date. When you employ a credit spread, you are simply buying one option to “cover” the risk you take when you write the other option.Question 9: E – Vertical spreads are directional strategies, and they can be employed as both bullish and bearish strategies. The bull vertical spread can be constructed using either puts or calls. Question 10: C – An iron condor is a complex spread trade used in the directionless market environment. More specifically, an iron condor is an option strategy composed of two vertical credit spreads — a bear call and a bull put.