Understanding Stock Options

What is a stock option?

• A method to avoid taxes on stock profits

• A guarantee of stock price increase

• A contract to buy or sell a stock at a set price

• A type of stock that pays dividends

Which of the following is true about owning options?

• You must own the underlying stock

• You have the obligation to buy the stock

• You have the right but not the obligation to buy the stock

• You can only sell the stock

What happens if an option expires worthless?

• The option is automatically renewed

• You gain a profit

• You lose your investment

• You can still exercise the option

What is the strike price in an options contract?

• The price at which the option was purchased

• The price at which the stock is currently trading

• The price you are betting the stock will reach

• The price at which the option expires

Why might an investor buy a call option?

• To guarantee a dividend payment

• To avoid paying taxes on stock profits

• To profit from a stock price increase

• To protect against a stock price drop

How does a put option work?

• It provides a dividend payment

• It guarantees a stock price increase

• It allows you to sell shares at a higher price

• It allows you to buy shares at a lower price

What does 'in the money' mean for a call option?

• The strike price is higher than the stock price

• The option is worthless

• The strike price is lower than the stock price

• The option has expired

What is a major risk of trading options?

• Inability to sell the option

• High transaction fees

• Potential to lose entire investment

• Guaranteed loss of investment

Why might options be considered less risky than stocks?

• They are always profitable

• They require less initial investment

• They guarantee a return

• They have no expiration date

What is a benefit of trading options?

• Fixed returns

• No risk involved

• Guaranteed profit

• Ability to bet on stock movement without owning it