Options Trading Module (Advanced) Practice Exam

Options Trading Module (Advanced) Practice Exam

The Options Trading (Advanced) Module is designed to equip learners with a comprehensive and in-depth understanding of the options market. This module goes beyond the basics, offering detailed insights into the mechanics, valuation, and strategic applications of options. It covers a wide range of topics, including different types of options, complex trading strategies, and risk management techniques, making it ideal for individuals aiming to master the intricacies of options trading.

Key Learning Objectives:

• Develop a broad-based and in-depth knowledge of the structure and functioning of the options market.
• Understand various types of options, including calls and puts, and their characteristics.
• Learn to design and implement advanced options strategies for speculation, hedging, and income generation.

Who Will Benefit from This Course?

• Students seeking specialized knowledge in financial markets
• Teachers and academicians in finance or economics
• Retail and institutional investors interested in derivative instruments
• Active traders looking to enhance their strategy toolkit
• Employees of brokers/sub-brokers aiming to strengthen client advisory skills
• Anyone with a keen interest in derivatives and capital markets

Exam Format

• Duration: 120 minutes
• No. of questions: 35
• Maximum marks: 100, Passing marks: 60 (60%); There is negative marking for incorrect answers.
• Certificate validity: 5 years from the test date. 

Course Outline

The exam covers the following topics:

1. Options – A Backgrounder
A. Derivative Types
B. Continuous Compounding
C. Option Valuation
D. Option Pricing Band

• Upper Bound: Call Option
• Upper Bound: Put Option
• Lower Bound: Call Option
• Lower Bound: Put Option

E. Put-Call Parity: European Options

• Position A undervalued
• Position B Undervalued

F. Put-Call Parity: American Options
G. Dividends

2. Quantitative Concepts – A Backgrounder
A. Normal Distribution
B. Share Prices – Lognormal Distribution
C. Linkages that arise from the Distribution
D. Volatility (s)

3. Binomial Option Pricing Model
A. Single Period Binomial
B. Multiple Period Binomial
C. European Put Option
D. Binomial Model for American Options
E. Role of Volatility in ‘u’ and ‘d’

4. Black-Scholes Option Pricing Model
A. European Call Option
B. European Put Option
C. Dividends
D. American Options

5. Option Greeks

• Delta
  • European Call on non-dividend paying stock
  • European Put on non-dividend paying stock
  • European Call on asset paying a yield of q
  • European Put on asset paying a yield of q
• Gamma
  • European Call / Put on non-dividend paying stock
  • European Call / Put on asset paying a yield of q
• Theta
  • European Call on non-dividend paying stock
  • European Put on non-dividend paying stock
  • European Call on asset paying yield of q.
  • European Put on asset paying yield of q
• Vega 
  • European Call / Put on non-dividend paying stock
  • European Call / Put on asset paying yield of q
• Rho
  • European Call on non-dividend paying stock
  • European Put on non-dividend paying stock

6. Volatility

• Historical Volatility (s)
• ARCH(m) Model
• Exponentially Weighted Moving Average (EWMA)
• GARCH Model
• Implied Volatility

7. Basic Option & Stock Positions
 A. Pay-off Matrix for Basic Option Positions

• Long Call
• Short Call
• Long Put
• Short Put

 B. Pay-off Matrix for Position in the Share

• Long Stock
• Short Stock

C. Assumptions
D. A Few Option Contract Intricacies

8. Option Trading Strategies
A. The Strategies
1. Single Option, Single Stock

• Protective Put
• Covered Put
• Covered Call
• Protective Call

2. Multiple Options of Same Type

• Bull Spread
• Bear Spread
• Butterfly Spread
• Calendar Spread
• Diagonal Spread

3. Multiple Options of Different Types

• Straddle
• Strangle
• Collar
• Range Forward - Long
• Range Forward – Short
• Box Spread
• Condor

B. Option Chain
C. Contract Fundamentals
D. Option Trading Intricacies
1. Choice of Strike Price
2. Choice of Expiry
3. Roll Over and Covered Calls

9. Exotic Options
A. Asian Option
B. Bermudan Option
C. Compound Option 
D. Binary Option
E. Barrier Option
F. Look back Option
G. Shout Option
H. Chooser Option

10. Market Indicators
A. Put-Call Ratio
B. Open Interest
C. Roll-over
D. Volatility