Options Trading

An investor buys a call option. The maximum loss occurs when:

• Spot price rises sharply

• Spot price falls below strike price

• Spot price equals strike price

• Volatility increases

Why does an option seller face unlimited loss in a call option?

• Premium is high

• Spot price can rise indefinitely

• Strike price is fixed

• Time value decreases

ATM options have highest time value because:

• They are cheapest

• They have highest intrinsic value

• Probability of profit is highest

• They have highest volatility

Intrinsic value of an option cannot be negative because:

• Premium is always positive

• Option holder will not exercise at loss

• Strike price is fixed

• Time value is positive

Near expiry, option premium becomes highly sensitive due to:

• Interest rate changes

• High intrinsic value

• Reduced time value

• High gamma

American options are priced higher than European because:

• Lower risk

• Can be exercised anytime

• Higher volatility

• Lower premium

Which scenario benefits a call option buyer the most?

• Falling market

• Stable market

• Rising market

• Low volatility

Option premium = Intrinsic value + Time value. If IV = 0, then:

• Option is ITM

• Option is ATM

• Option is deep ITM

• Option has profit

Why do option buyers prefer high volatility?

• Reduces premium

• Increases probability of profit

• Reduces intrinsic value

Time decay impacts most on:

• Deep ITM

• Deep OTM

• ATM options

• Futures