Unicorn Academy › The options markets

The options markets: 45 questions and answers

The questions from the The options markets course, each with the correct answer and a short explanation. Learn the topic step by step in the Unicorn Academy app.

1. What an option is

What does an option give its buyer?

The right, but not the obligation, to buy or sell at a set price The buyer can choose whether to exercise.

What does the buyer lose by letting the option expire?

Only the premium paid The premium is the cost of the right.

Since when have exchange-listed options existed in the United States?

Since 1973 In 1973 the first dedicated exchange opened in Chicago.

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2. Calls and puts

Which right does a call give?

The right to buy the underlying at the set price A put instead gives the right to sell.

When does the buyer of a put gain?

When the price falls enough The fall must exceed the premium paid.

Which position limits the loss to the premium?

Buying an option The buyer risks only what they have paid.

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3. Strike, expiry and premium

What is the strike?

The price at which the underlying can be bought or sold It is the exercise price.

Who pays the premium, and to whom?

The buyer to the seller The premium is the price of the right.

When do the monthly expiries of equity options fall?

On the third Friday of the month There are also more frequent expiries.

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4. Buyer and seller

What is the maximum loss for the buyer of an option?

The premium paid It is known from the start.

What must the seller of a call do if the buyer exercises?

Sell the underlying at the exercise price The obligation holds whatever the market price.

What is the seller's maximum gain?

The premium collected The seller has a limited gain and greater risk.

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5. The standard contract

How many shares does an equity option contract normally cover in the United States?

100 It is the standard multiplier.

How much does a contract with a premium quoted at 2 dollars cost?

200 dollars The premium per share is multiplied by 100.

Who guarantees listed option contracts in the United States?

The Options Clearing Corporation It is the clearing house for options.

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6. Intrinsic value and time value

What is intrinsic value?

What would be received by exercising immediately It is the part of the premium due to the immediate advantage.

A call with a strike of 100 on a share at 108 has a premium of 11. What is the time value?

3 Intrinsic value is 8, the rest of the premium is time value.

How much is time value worth at expiry?

Zero At expiry only intrinsic value remains.

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7. In, at and out of the money

When is a call in the money?

When the strike is below the price of the underlying In that case it has intrinsic value.

What does the premium of an out of the money option consist of?

Only time value There is no immediate advantage in exercising it.

What is the limitation of out of the money options?

They require a large move before expiry and often expire worthless The low price reflects the low probability.

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8. American style and European style

When can an American-style option be exercised?

At any time up to expiry European style allows exercise only at expiry.

What style are options on individual shares in the United States?

American Those on the main indices are instead European style.

How are index options settled?

In cash An index cannot be delivered.

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9. What moves the premium

What happens to calls if the price of the underlying rises?

They are worth more Puts do the opposite.

What effect does higher expected volatility have?

It raises the price of both calls and puts More expected movement means more value for both.

Can you lose while being right about the direction?

Yes, if the move comes late or expected volatility falls Time and volatility weigh as much as direction.

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10. Implied volatility

What is implied volatility?

The future volatility that the market is pricing into the option It is derived from the premium with a pricing model.

What does the VIX index measure?

The thirty-day implied volatility of options on the S&P 500 It rises when protection costs more.

What usually happens to implied volatility right after quarterly results?

It falls The uncertainty about the event has been resolved.

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11. Delta

What does delta measure?

The sensitivity of the premium to the price of the underlying It indicates how much the premium changes for a one-dollar move.

In what range does the delta of a call lie?

From 0 to 1 For puts the range is from minus 1 to 0.

About how much does a call with a delta of 0.50 gain if the share rises by one dollar?

50 cents The premium moves by half the move in the underlying.

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12. Gamma

What does gamma measure?

How much delta varies as the underlying moves It is the speed at which delta changes.

When is gamma highest?

For at the money options close to expiry Near expiry small moves count for a lot.

What gamma do option sellers have?

Negative Risk grows just when the market moves against them.

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13. Theta

What does theta measure?

The value lost simply through the passing of one day It is time decay.

For whom is theta a cost?

For option buyers For sellers it is instead income.

How does decay behave as expiry approaches?

It accelerates In the final weeks the loss of value is faster.

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14. Vega

What does vega measure?

The sensitivity of the premium to implied volatility It indicates how much the premium changes for one point of volatility.

Who gains from a rise in implied volatility?

Those who have bought options The premium of the options held rises.

Why can an option lose value after quarterly results even with the right direction?

Because implied volatility drops after the announcement Vega can take away more than delta gives.

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15. Exercise and assignment

What does exercising a call mean?

Buying the underlying at the strike With a put you instead sell the underlying.

Can the seller refuse assignment?

No The obligation was taken on by selling the option.

What normally happens to in the money options at expiry?

They are exercised automatically Those who do not want exercise must close beforehand.

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