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Quizzes > Quizzes for Business > Finance

Stock Trading & Options Knowledge Test

Sharpen Your Investment and Options Skills

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art depicting elements related to stock trading and options for a knowledge test

Take the Stock Trading & Options Knowledge Test to measure your grasp of key trading concepts and option strategies. Ideal for beginner and intermediate investors seeking to reinforce their trading fundamentals, this engaging stock trading quiz pinpoints strengths and gaps alike. Each multiple-choice question guides you through real-world scenarios, allowing you to explore advanced techniques or brush up on the basics with the Basic Options Trading Knowledge Test. In just minutes, you can customise your experience in the editor and mix in content from the Stock Trading Fundamentals Quiz or other quizzes. Joanna Weib invites you to dive in, test your skills, and elevate your investment game.

What does a simple moving average indicate in technical analysis?
The average price over a specified period, indicating trend direction.
The potential future volatility of a stock.
The current market interest rates.
The dividend yield of the underlying asset.
A simple moving average smooths price data over a set number of periods to highlight the underlying trend. It does not measure volatility, interest rates, or dividend yield.
Which option contract gives the holder the right to buy an underlying asset at a specified price?
Call option
Put option
Futures contract
Swap contract
A call option grants the holder the right, but not the obligation, to purchase the underlying asset at the strike price. A put option grants the right to sell instead.
In market analysis, what does trading volume primarily measure?
The number of shares or contracts traded within a period.
The volatility of price movements.
The time remaining until expiration.
The total market capitalization.
Volume indicates how many shares or contracts have changed hands over a specific period. It does not directly measure volatility, time to expiration, or market cap.
Which option Greek measures the sensitivity of an option's price to changes in the underlying asset's price?
Delta
Theta
Vega
Rho
Delta quantifies the change in an option's price for a one”unit change in the underlying asset's price. Theta measures time decay, Vega measures volatility sensitivity, and Rho measures interest rate sensitivity.
Which principle of risk management determines the amount of capital allocated to a single trade?
Position sizing
Fundamental analysis
Leverage usage
Market timing
Position sizing is the risk management technique used to decide how much capital to risk on any given trade. It ensures consistent risk exposure per trade.
What does a Relative Strength Index (RSI) above 70 typically indicate?
Overbought conditions
Oversold conditions
Neutral market sentiment
High volatility
An RSI reading above 70 generally signals that an asset may be overbought and due for a pullback. It does not directly measure volatility or neutrality.
Which describes a protective put strategy?
Holding a long stock position and buying a put option for downside protection.
Selling a put and buying a call on the same strike.
Shorting the stock and buying a put.
Buying both a call and a put at the same strike (straddle).
A protective put involves owning the underlying and purchasing a put to cap potential losses. It is different from straddles or other combined strategies.
How is the risk-reward ratio calculated in trading?
Potential profit divided by potential loss.
Potential loss divided by potential profit.
Total capital divided by margin requirement.
Volatility divided by expected return.
Risk-reward is defined as how much you stand to gain relative to what you could lose. It is calculated by dividing the potential profit by the potential loss.
In candlestick chart analysis, what does a doji candle signify?
Market indecision with opening and closing prices nearly equal.
Strong bullish momentum.
Imminent trend reversal guaranteed.
High trading volume.
A doji forms when open and close prices are virtually the same, indicating indecision among buyers and sellers. It does not guarantee a reversal or imply volume.
Which Greek represents the rate of decline in an option's value due to time decay?
Theta
Gamma
Vega
Delta
Theta measures how much an option's price will decrease as time to expiration passes. Gamma measures the rate of change of Delta, and Vega measures volatility sensitivity.
What does a delta of 0.5 for a call option signify?
The option price will change by approximately $0.50 for each $1 change in the underlying asset's price.
The option will expire in half of its original time.
The position has a 50% probability of expiring in-the-money.
The premium equals half the underlying price.
Delta of 0.5 means the option's price moves about fifty cents for every one-dollar move in the underlying. It does not refer to time to expiration or probability directly.
When the MACD line crosses above its signal line, it generally indicates what?
A potential bullish momentum shift.
A strong bearish reversal.
Overbought market conditions.
An increase in implied volatility.
A bullish MACD crossover occurs when the MACD line moves above its signal line, suggesting upward momentum. It is not a direct measure of volatility or overbought status.
What does implied volatility represent in options pricing?
The market's expectation of future price fluctuations.
Historical volatility of the underlying.
The option's time to expiration.
The current risk-free interest rate.
Implied volatility is backed out from current option prices and reflects the market's forecast of future volatility. It is forward”looking, not historical.
Which strategy profits from large price movements in either direction but has limited risk to the premiums paid?
Long straddle
Covered call
Iron condor
Protective collar
A long straddle involves buying a call and a put at the same strike, profiting from big moves up or down. Risk is limited to the total premiums paid.
In a bull call spread, what is the maximum loss?
The net premium paid.
Unlimited.
The difference between strike prices.
The value of the underlying asset.
A bull call spread's worst-case loss is the initial net debit paid for the spread. You cannot lose more than the premium outlay.
According to the Black-Scholes model, how does an increase in implied volatility affect the price of an option?
It increases both call and put option premiums.
It decreases both call and put option premiums.
It only affects call option premiums.
It only affects put option premiums.
Higher implied volatility raises the expected range of future prices, increasing the value of both calls and puts in the Black-Scholes framework. Volatility is a key input for option pricing.
A trader has $100,000 capital and is willing to risk 2% per trade. If the stop-loss is set at 5% below the entry price of $50, how many shares can the trader purchase?
800 shares
400 shares
2,000 shares
1,000 shares
Risk per trade is $100,000 × 2% = $2,000. A 5% stop-loss on $50 is $2.50 risk per share, so $2,000 / $2.50 = 800 shares.
Which Greek measures an option's sensitivity to changes in interest rates?
Rho
Theta
Gamma
Vega
Rho indicates how much an option's price will change for a 1% change in the risk-free interest rate. Theta measures time decay, Gamma measures Delta sensitivity, and Vega measures volatility sensitivity.
What does a negatively skewed return distribution imply about potential investment outcomes?
There are larger or more frequent extreme negative returns.
Returns are perfectly symmetrical around the mean.
The distribution has a long right tail of positive outliers.
Average returns are higher than median returns.
Negative skewness means the left tail is longer, indicating a higher chance of extreme negative outcomes. It does not imply symmetry or a longer right tail.
In an iron condor strategy, what is the maximum profit potential?
The net premium received initially.
Unlimited.
Difference between the middle strikes.
Difference between the outer strikes.
An iron condor's maximum profit occurs if all options expire worthless, equal to the net premium collected. It is limited and not unlimited or based on strike differences.
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Learning Outcomes

  1. Analyse market indicators to make informed trading decisions.
  2. Identify key differences between calls and puts in options contracts.
  3. Evaluate risk-reward scenarios for various trading strategies.
  4. Apply technical analysis to interpret price charts and trends.
  5. Demonstrate understanding of option pricing factors and Greeks.
  6. Master position sizing and risk management principles.

Cheat Sheet

  1. Understand Market Indicators - Think of indicators like your market compass; tools such as moving averages, RSI, and MACD help you spot trends or potential reversal points before they happen. For example, when the 50-day moving average crosses above the 200-day, it's a classic bullish signal that can boost your confidence. Technical Indicators
  2. Differentiate Between Calls and Puts - Calls give you the right to buy an asset, while puts give you the right to sell it at a set price before expiration. Remember "Call up" to buy and "Put down" to sell, which is the kind of catchy slogan your brain loves. Call Option & Put Option
  3. Evaluate Risk-Reward Scenarios - Use the risk-reward ratio to see if the prize is worth the gamble: Potential Loss ÷ Potential Gain. A ratio of 1:3 means risking $1 for a chance to make $3, which often keeps your edge sharp and your losses small. Risk-Reward Ratio
  4. Apply Technical Analysis - Get cozy with price charts and patterns like head & shoulders, double tops, and flags - they're like secret messages from the market. Spotting a head and shoulders pattern, for instance, can hint at a pending trend reversal that savvy traders jump on. Technical Analysis
  5. Master Option Pricing Factors - Option prices dance to the tune of the underlying asset price, strike price, time until expiration, volatility, interest rates, and dividends. The legendary Black-Scholes model is your backstage pass to estimating fair option values. Black-Scholes Formulas
  6. Learn the Option Greeks - These are your option superpowers: Delta measures price change per $1 in the asset, Theta tracks time decay, and Vega shows how volatility shifts premiums. For example, a Delta of 0.5 means your option moves $0.50 when the underlying moves $1 - math that turns you into a prediction pro. Option Greeks
  7. Implement Position Sizing - Decide how much capital to risk on each trade so you're never betting the farm. A popular rule: risk no more than 2% of your total account on any single play, keeping your portfolio comfy through wild market swings. Position Sizing
  8. Practice Risk Management - Use stop-loss orders to put a protective fence around your profits and cut losses short. For instance, setting a stop-loss at 5% below your entry price can save you from nasty surprises. Risk Management
  9. Understand Implied Volatility - IV reflects market expectations of future price swings and directly affects option premiums - higher IV means pricier options. Keeping an eye on IV gives you a sneak peek at market mood and potential cost. Implied Volatility
  10. Stay Informed on Market News - Financial headlines and economic data releases are like the market's group chat: earnings reports, GDP numbers, and geopolitical events all move prices. Tune in to reliable sources so you're always trading with the latest scoop. The Wall Street Journal & Bloomberg
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