The Option Profit Formula

Lesson 2 Quiz: Option Pricing

1. What is the options strike price?_________________________

__________________________________________________
2. In regards to the stock options relationship to the stock price, what do
the following abbreviations stand for?
a. ATM: _____________________
b. ITM: _____________________
c. OTM: ____________________
3. New traders should pick the _______ stock option when placing their
trade.
**Remember: picking that option is not necessarily the best strategy,
but it is the easiest for beginners as they often get confused as to
which option to pick. Your particular trading strategy ultimately
determines which option to pick.

4. The e_________ value of an option is the dollar value that is placed on

the remaining life of the option. This value is also called t______
value.

5. The in-the-money (ITM) options have value because they allow you to
either purchase the stock at a discount (in the case of a Call option),
or sell the stock at a high price (in the case of a Put option). This value
is called i__________ value.

6. Because of the rapid time value decay of an options premium, you

should sell or close out your option positions ____ days before they
expire.
a. 15
b. 30
c. 60
d. 7

7. True or False: Volatility is a measure of price movement over a given

period of time.

8. True or False: The more volatile a stock is, the higher the options
premium will be.
1 |OPF Lesson 2 Quiz; Copyright 2011 www.learn-stock-options-trading.com
 The Option Profit Formula
9. What is Historical Volatility? _________________________________

________________________________________________________

10. What is Implied Volatility? __________________________________

________________________________________________________

**Answer Key on the Next Page**

(And remember no cheating)

2 |OPF Lesson 2 Quiz; Copyright 2011 www.learn-stock-options-trading.com

 The Option Profit Formula
Lesson 2 Answer Key

1) The strike price is the price at which the stock will be bought or sold
when the option is exercised.
2) ATM: At-the-money: ITM: In-the-Money; OTM: Out-of-the-Money
3) ATM (At-the-Money)
4) Extrinsic; Time Value
5) Intrinsic
6) B:30
7) True
8) True
9) Historical Volatility: tells us how volatile something has been in the
past.

10) Implied Volatility: is the market's view on how volatile things will
be in the future.

3 |OPF Lesson 2 Quiz; Copyright 2011 www.learn-stock-options-trading.com