The quiz was designed to encourage you to understand the basic concepts of options before moving on to more advanced material.

If you are new to stock options and perhaps had some lessons, viewed seminars videos, or read one or more books, it is a good idea determine how well you absorbed the material. Please do not make the mistake of believing that this stuff is so easy to understand that you can satisfy your eagerness to get started trading options.


A solid background will make the entire options-education process much more efficient.

ANSWERS
 

1. True. When you buy options losses are limited to the cash paid to buy the options.

2. False. When you sell call options (without buying any other call options) your losses are theoretically unlimited because the price of the underlying stock has no upper limit. 

3. You own one option: XYZ Feb 16 '15 75 call.
          The strike price is $75 per share.
          The option expires when the market closes for trading on Feb 16, 2015.

4. If you exercise an option that you own you purchase 100 shares of the underlying asset and pay the strike price per share. This transaction is made automatically once the option is exercised. The next business day (after expiration), your account will show that you own 100 shares of the underlying asset and that the cash to pay for those shares have been removed.    

5. If you are assigned an exercise notice on an option that you own, what happens? Nothing happens.

You cannot be assigned an exercise notice unless your account is short (i.e., you sold and have not repurchased) an unexpired option. If you are assigned on an option that you sold, you must honor the conditions of the option contract. If you are assigned on a call option, you must sell 100 shares (even if you do not own the shares) of the underlying asset at the strike price. If you are assigned on a put option, you must buy 100 shares at the strike price.

6. Do not be concerned because the option contract is guaranteed (i.e., it remains valid) by the OCC (Options Clearing Corporation). When you buy or sell any option(s), do you have to be concerned about the person on the other side of the trade? If he/she goes bankrupt, is your option still valid? 

7.All options work exactly the same way, regardless of whether the underlying asset is a stock, ETF, or Index? True or False?  False. Most options work as expected. However, European Style options (Index Options) are different. You can read about those differences here. 

8. You instruct your broker to buy 10 ABCD Nov 18 '16 45 calls at the limit price of $1.35, or better. A few seconds later you receive confirmation that you bought those 10 calls at $1.40 each. Is that ok with you? No. When you enter a limit order to buy options, you cannot pay more than the limit price. Call the broker and tell them that they made a mistake.  When you enter a limit order to sell options, you cannot receive less than the limit price.

9. You instruct your broker to buy a calendar spread. Using a limit order, you want to buy 3 IBM April calls and sell 3 IBM March calls. The limit price is $2.00, or better. At the end of the day, your broker tells you that you bought the April calls but that he was unable to sell the March calls. Your position is now long 3 IBM April calls. Is that ok with you? No. When you enter a spread order, you must be filled on all (or none) of the options that are part of the spread. Note that it is possible to trade fewer spreads (less than 3 in this example).

10. You sold 6 RGTO puts with a strike price of $20 per share. When expiration arrives, you are still short those puts (i.e., you never bought those options to close the position). The closing price for this stock on expiration Friday is $19.87. What, if anything, do you expect to happen? Expect that you will be assigned an exercise notice on all 6 put options, making you obligated to buy 600 shares of RGTO at $20 per share. When you see your account on Monday, the transaction will have already taken place.  The 600 shares are in your account and $12,000 has been removed.

Bonus question: 11. This is a much less common situation. Do you know the rules? You own 3 GE (General Electric) put options with a strike price of $25. At expiration, you still own the options (this is a mistake because you should have sold them) and the stock price is $24.99.  You call the broker one minute after the market closes on expiration Friday, and he tells you that there is nothing you can do -- they cannot be sold because the options stopped trading when the closing bell rang -- and that these options (according to the option-trading rules) will be exercised automatically for you. As a result you will sell 300 shares of GE at $25 per share. This is not what you want. Was your broker correct when telling you that there is nothing that can be done to prevent this automatic exercise? No. Your broker made a mistake. You have the right to submit a DO NOT EXERCISE order for any in-the-money option that you own, but do not want to exercise. Warning: There is a very short time window for taking this action. Call immediately after the close - or even before the close of trading - to exercise your right to make this decision. Ask your broker what their cutoff time is for submitting this notice. NOTE: You also have the right to exercise an option that is out of the money (this is a very rare occurrence) by submitting a DO EXERCISE notice. 

          

It is important to know the correct answers for questions 1 through 10.