WorksheetsOptions Trading Quiz
Total questions: 64
Worksheet time: 33mins
What are stocks?
Stocks are contracts tied to options that you must exercise
Stocks are buy and hold investments, you’re buying ownership of a company
Stocks are always cheaper than options because there’s no premium
Stocks and options are the same thing on Thinkorswim
What is an option?
An option is ownership of 100 shares forever
An option is a contract tied to a stock that gives you the right but not the obligation to buy or sell at a set strike price on or before a set expiration, for a premium
An option is a margin loan you must repay
An option is a futures contract with undefined risk
How many shares does one option contract control?
One option contract controls 10 shares
One option contract controls 50 shares
One option contract controls 100 shares
One option contract controls 1,000 shares
What is the premium when you’re looking at an options contract?
The premium is a random number between bid and ask
The premium is simply the price of the option (the mark price)
The premium is only the bid price
The premium is the theoretical price only
Which statement correctly describes how calls and puts profit relative to the stock’s direction?
Calls profit when the stock goes down and puts profit when the stock goes up
Calls profit when the stock goes up and puts profit when the stock goes down
Calls and puts only profit if you hold to expiration
Calls and puts require owning the stock upfront
Which statement best describes the maximum risk when buying options in a cash account?
With options, the max you’re going to lose is unlimited
With options in a cash account, the max you’re going to lose is the premium you paid
With options, margin is required and risk is undefined
With options, you always risk the full notional of 100 shares
In my options strategy, how do we open and close positions?
We sell to enter and buy to exit
We buy to enter and sell to exit
We exercise to enter and write to exit
We short to enter and cover to exit
What do the bid and ask represent on the options chain?
The bid is the lowest price sellers are asking
The ask is the highest price buyers are willing to pay
The bid is buyers, the ask is sellers
The mark is always equal to the ask
On an options chain, what is the mark price?
The mark price is the midpoint between the bid and the ask
The mark price is yesterday’s close
The mark price is the 52-week average
The mark price is only used for futures
Which statement correctly defines an in-the-money call?
In the money calls have strikes above the current stock price
In the money calls have strikes below the current stock price
In the money puts have strikes above the current stock price
Out of the money contracts already have intrinsic value
Which statement about out-of-the-money (OTM) puts is correct?
Out of the money puts have strikes above the current price
Out of the money puts have strikes below the current price
Out of the money means it already reached the target
Which statement best defines intrinsic value?
Intrinsic value is the real value if exercised right now
Intrinsic value is time value only
Intrinsic value is bid minus ask
Intrinsic value is open interest
What is Extrinsic value?
Extrinsic value is the right to 100 shares
Extrinsic value is time value and implied volatility (how much time is left and how volatile the market expects the stock to be)
Extrinsic value is only delta
Extrinsic value is only gamma
Which statement best describes Delta?
Delta tells you how much your option will gain or lose for each $1 move in the stock
Delta tells you how much time decay you have each day
Delta is the number of contracts traded today
Delta is the distance between zones
Which statement best describes Theta?
Theta is positive for option buyers
Theta shows how much value the option loses in 24 hours due to time decay
Theta only applies on expiration day
Theta is the same as volume
How do you quickly estimate the impact of one hour of time decay (Theta) on a day trade?
To estimate 1 hour of theta on a day trade, divide the daily theta by 24
To estimate 1 hour of theta, multiply theta by 24
Theta per hour equals the bid price
Theta per hour equals the mark price
Which statement best describes Gamma?
Gamma tells you how expensive options are
Gamma tells you how fast delta changes as price keeps moving (acceleration to delta)
Gamma is the same as Vega
Gamma only applies to puts
What does Vega represent in options pricing?
Vega represents volatility and re-prices the contract based on implied volatility
Vega is always zero unless it’s earnings day
Vega is the same as open interest
Vega measures how many contracts are still open from previous days
What is IV Crush?
IV Crush happens when implied volatility rises after earnings and premiums expand
IV Crush happens when implied volatility falls right after earnings and options can lose a ton of value even if price moves in your favor
IV Crush only affects stocks, not options
IV Crush means your delta goes to zero
What do volume and open interest represent on the options chain?
Volume shows how many contracts are still open from previous days
Open interest shows how many contracts traded today
Volume shows how many contracts traded today, open interest shows how many positions are still open from previous day
Volume and open interest mean the same thing
Why do we check liquidity before entering an options trade?
Liquidity doesn’t matter if your delta is 40 cents
High volume and open interest are good signs for liquidity (easier to get in and out with less slippage)
Low volume is better because fills are faster
Only the ask price determines liquidity
On Thinkorswim, where do you access the options chain?
On Thinkorswim, access the options chain under Charts → Flexible Grid
On Thinkorswim, access the options chain under Trade tab → All Products
On Thinkorswim, access the options chain only through Active Trader
On Thinkorswim, you must own shares to see the options chain
In the options chain layout, where do the strike prices appear?
The strike column is on the far left
The strike prices run down the middle between calls and puts
Strikes are hidden and only show at expiration
Strikes equal the current stock price
For day trading, what is the golden rule regarding expiration choices?
For day trading, the golden rule is: Monday-Wednesday choose Friday’s expiration & Thursday-Friday choose next week
For day trading, always choose same-day expiration
For day trading, always choose 90-day expiration
For day trading, expirations don’t matter
What is the minimum expiration you recommend for swing trading in this strategy?
For swing trading, minimum is a two-week expiration to slow theta and let delta work in your favor
For swing trading, minimum is one day expiration
Which statement correctly describes how to use ATR for timing between zones?
Use ATR on the daily (or weekly) as a clock to estimate how many days a move between zones may take
ATR measures open interest
ATR equals delta plus theta
ATR is only for futures, not options
If the distance between zones is less than the daily ATR, that's a ____ trade?
If the distance between zones is less than the daily ATR, that's a swing trade
If the distance between zones is less than the daily ATR, that's a day trade
If the distance between zones is greater than ATR, it must be a scalp
Distance and ATR are not related to trade type
How should you choose expiration after using ATR to estimate the number of days for a move?
After estimating days from ATR, pick exactly that many days to expiration
After estimating days from ATR, double it as a buffer and choose a further expiration (more time)
After estimating days from ATR, halve it to reduce cost
ATR has no role in expiration selection
What’s the key framework for selecting a strike?
Choose strikes only by price
When picking a strike, think delta (closest to a 40 cent delta) and liquidity (volume and open interest)
Always choose deep in the money because delta is higher
Always choose far out of the money regardless of liquidity
In this strategy, what are we actually doing with options?
We exercise options to take ownership as our main strategy
We trade the contract itself: buy the option at a lower premium and sell it higher before expiration
We sell to enter credit positions as our main strategy
We hold everything until expiration
True
False
What does a 1:3 risk-reward mean?
A 1:3 risk-reward means risk $3 to make $1
A 1:3 risk-reward means risk $1 aiming for $3 of profit
A 1:3 risk-reward only applies to stocks, not options
A 1:3 risk-reward ignores theta
What standard rule do I use for managing an option’s premium in this strategy?
A standard rule I use is a 20% stop loss and a 60% target on the option’s premium
A standard rule is a 5% stop loss and a 10% target
A standard rule is no stop and no target
A standard rule is to risk 100% of the premium
What does placing a stop-loss mean in this options strategy?
If you place a stop loss, you still might lose 100% unless it’s in the money
If you place a stop loss, you’re not going to hold it until expiration, you’re defining your risk on the premium
Stops don’t work on options
Targets can’t be placed on options
For day trades, what is the significance of theta?
For day trades, theta is negligible if you choose the right expiration and hold about an hour (theta per hour ≈ daily theta/24)
For day trades, theta is the largest part of the move
For day trades, you must avoid stops because of theta
For day trades, always hold through the close
When following this strategy, which statement correctly describes your position when you buy a call or put?
Buying an option requires you to own the stock upfront
Buying an option means you do not need to own the stock upfront, you’re trading the contract
Buying an option opens a margin short
Buying an option forces assignment
Which statement correctly describes the capital requirements for option buyers versus option sellers?
Option sellers put up the big capital, option buyers put up the premium
Option buyers put up the big capital, option sellers put up nothing
Sellers and buyers put up the same amount
Sellers only trade after hours
What did I say about trading options around earnings when implied volatility (Vega) is elevated?
Holding through earnings with high Vega is safe because delta pays you anyway
When implied volatility is high going into earnings, options are more expensive and can get crushed after (IV Crush)
Vega only helps calls and hurts puts
Earnings remove theta
How do you customize the options chain columns in Thinkorswim?
To customize your options chain columns on Thinkorswim, go to Customize column sets and add Mark, Delta, Theta, Volume, Open Interest
You cannot customize the options chain columns
Only theoretical price can be shown
Columns are fixed to Bid and Ask only
When I say “we buy to enter and we sell to exit,” what am I telling you to do with options in my strategy?
Sell to enter and buy to exit the shares
Short the stock first, then cover later
Buy the contract when it’s cheaper and sell it when it’s more valuable
Exercise calls to get 100 shares every time
If the premium shows 2.15 on the options chain, what does it actually cost to buy one contract?
$2.15
$21.50
$215
$2,150
On the options chain layout I showed, which side lists calls and which side lists puts?
Calls on the right, puts on the left
Calls on the left, puts on the right
Both mixed together in one column
Calls only, puts are on a separate page
Bid represents:
Where sellers are posting their asks
The highest price buyers are currently willing to pay
The last traded price
The theoretical value from the model
Ask represents:
The lowest price sellers are currently asking for
The highest price buyers will pay
The open interest from prior days
The mark minus bid
Volume on the options chain tells you:
How many contracts are still open from previous days
How many contracts traded today
How many shares the stock traded today
The total number of market makers quoting
Open Interest tells you:
How many contracts traded today
How many open positions remain from previous days
The daily ATR on the underlying
The number of brokers routing orders
In my approach, why do I care about liquidity (volume + open interest) before entering?
To increase margin buying power
To make sure it’s easy to get in and out with less slippage
To qualify for zero-commission routing
To guarantee a win
What's my baseline stop-loss/target framework for managing option premium?
50% stop, 10% target
10% stop, 30% target
20% stop-loss and 60% target (1:3 risk-reward)
No stop; let it ride
If I enter a contract at $2.00, where is a 20% stop-loss placed?
$1.80
$1.60
$2.20
$0.20
If I enter a contract at $2.00, where is a 60% target placed?
$2.60
$3.20
$1.40
$4.00
Why do I say we use cash accounts (not margin) for this strategy?
To earn interest on settled cash
Because with buying options, your risk is defined to the premium you paid
To short shares more easily
To exercise assignments by default
When I say “calls have a positive delta and puts have a negative delta,” what does that mean?
Calls move opposite the stock, puts move with it
Calls move with the stock, puts move opposite the stock
Both move opposite the stock
Both move with the stock
Theta represents:
Volatility sensitivity
Time decay (how much value the option loses as time passes)
Directional sensitivity to the stock
Interest rate risk
If theta shows -0.54 per day and you hold a day trade for one hour, what’s the approximate time-decay impact I showed?
About $0.54
About $0.27
About $0.02 (theta/24)
Zero
Gamma in my explanation is best thought of as:
A tax on premium
The acceleration of Delta as price keeps moving
A probability of assignment
The distance between zones
Why do I prefer out of the money 40-cent Delta contracts for day trades?
They’re the cheapest possible contracts regardless of liquidity
Higher risk of IV crush makes them ideal
Because Gamma can accelerate the Delta in my favor and liquidity is usually solid
Why don’t we hold options to expiration in this strategy?
We want assignment on purpose
Because we trade the contract itself, use a stop-loss and a target, and exit before expiration
Brokers won’t allow it
It’s illegal to hold to expiration
If a call expires out of the money for a buyer, what happens to the premium paid?
It’s refunded
It becomes interest on margin
It goes to zero (max loss is the premium)
It converts to open interest
“In the money” for a put means:
Strike is above current price
Strike is below current price
Strike equals VWAP
Strike equals daily open
When choosing between two similar Deltas for a less-liquid ticker, what additional filter did I emphasize?
Highest commission route
Highest volume and open interest (liquidity)
Lowest last price
Widest spread
What did I say about exercising options in this strategy?
We routinely exercise to take 100 shares
We never sell; we always exercise
We don’t exercise; we trade the premium and exit before expiration
Exercise only on Fridays
Where do you type the ticker to make sure the chain matches the stock you’re analyzing?
Bottom right of Charts tab
Top left of the Trade tab (All Products)
In the Scan’s query box
In the Level II window
Why did I show Netflix contracts being way more expensive around earnings?
Higher dividends
Lower liquidity
Higher implied volatility (Vega) due to an expected move
Market holiday
What simple summary did I give for the Greeks?
Delta taxes you, Theta pays you, Gamma slows you, Vega ignores you
Delta pays you, Gamma accelerates it, Theta is like a tax (negative), Vega reprices the contract
Gamma pays you, Delta decays you, Theta accelerates, Vega is fixed
Vega pays you, Theta pays you, Delta is random, Gamma is irrelevant
