Do I know enough to say I'm knowledgeable about options?I asked myself this question earlier today and with the help of reddit I'd like some of y'all to ask me some questions that someone who's fairly knowledgeable about should know. I will not Google anything if I do not know it I will simply say I don't.
By the end of this comment section I'll know where I need to be.
So I’ve been in options for a couple months now.
byu/SnooGoats4766 inoptions
Posted by SnooGoats4766
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My benchmark is 100 trades closed. Even if that is on paper trading, having 100 trades under your belt is better than nothing. So if you haven’t done 100 trades yet, it doesn’t matter if you get a perfect score on your Reddit quiz, you’re probably still not ready.
Anyway, here are some questions:
1. Does a long put benefit or suffer if interest rates increase?
1. In Black-Scholes, d2 = d1 — X. What is X? Hint: X is an expression of two free variables in the model.
1. The singular form of LEAPS is LEAP. True or false?
1. What happens if you hold a call credit spread to expiration and the underlying price is between the strikes of the two legs? Describe in terms of expiration consequences.
1. What happens to your calls if you hold 2026 calls for XYZ and XYZ is totally bought out by a private equity firm in an all cash deal effective June 17 of 2024?
1. If your broker approved you to trade covered calls only, you can trade a Poor Man’s Covered Call. True or false?
1. For ABC calls, Robinhood quotes a price of $.75 for the $100 strike call and $1.00 for the $105 calls, and ABC is currently $90. How can this happen? (There are multiple correct answers to this question.)
1. What is the difference between a 0 DTE box spread on SPY and a 0 DTE box spread on SPX, if they both paid the same opening credit?
What would happen to an options chain when a company issues a SPECIAL dividend of 96 cents?
Maybe it was unfair to throw a math question into the mix. Also, since options were created for hedging, it makes sense to add in a hedging question.
Referring to: https://www.reddit.com/r/options/comments/1d1xk89/comment/l5wy2p3/
> In Black-Scholes, d2 = d1 — X. What is X? Hint: X is an expression of two free variables in the model.
Let me rephrase that question into a narrative question about the implications of the math, since that’s more important than the math equation anyway. I’ll do it two parts:
1. What are the five free variables in Black-Scholes?
1. In terms of calls, to keep things simple: delta (which is N(d1) in Black-Scholes) can be used to approximate the probability of ITM at expiration (which is N(d2) in Black-Scholes). What two things can occur that have a negative impact on the approximation? In other words, the more of X1 or X2 or both that occurs, the less accurate delta is at approximating probability of ITM at expiration. Hint: X1 and X2 are among the free variables in the model.
Spoiler: The math and implications of the math are explained in this article, which I believe to be a must-read for anyone trading options: https://www.reddit.com/r/options/comments/14jo0er/lessons_from_the_50_delta_option/
Finally, a hedging question:
3. Suppose you have 100 shares of ZZZ that you bought at $100/share and now are worth $150/share. You want to hedge at least $30/share of those gains up to and including the July expiration of this year. Which is the better hedge and why? (A) Write a July covered call that pays a $30/share premium, even if the call has to be ITM to do so, or (B) buy a $135 strike July put that costs $5. Assume ZZZ does not pay a dividend.