Section 6

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Section 6

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1 point

1. Which of the following best describes Extrinsic Value? *

1 point

A. The guaranteed profit of an option

B. The portion of the premium based on time and volatility

C. The value if exercised right now

D. The difference between strike price and intrinsic value

2. Why does extrinsic value decay as expiration approaches? *

1 point

A. Because intrinsic value decreases

B. Because the stock becomes less volatile

C. Because there is less time for the stock to make a meaningful move

D. Because market makers manually reduce the price

3. Theta is typically represented as:

1 point

A. A positive number for buyers

B. A negative number showing daily loss of value

C. A volatility measurement

D. The intrinsic value of an option

4. If an option has Theta = -0.09, this means:

1 point

A. The option loses $0.09 per week

B. The option loses $0.09 per day, all else equal

C. The stock loses $0.09 per day

D. The option gains $0.09 per day

5. Which statement about extrinsic value at expiration is correct?

1 point

A. It becomes zero only for OTM options

B. It becomes zero only for ITM options

C. It becomes zero for all options

D. It remains depending on volatility

6. Time decay accelerates the most:

1 point

A. 90+ days before expiration

B. 60–90 days before expiration

C. 30–45 days before expiration

D. In the first week after buying the option

7. In the concert ticket analogy, what represents the option’s extrinsic value?

1 point

A. The price of the artist

B. The venue size

C. The time remaining until the event

D. The ticket color

8. The statement “time decay is NOT linear” means:

1 point

A. Theta stays constant every day

B. Theta becomes slower as expiration approaches

C. Theta speeds up significantly as expiration approaches

D. Theta is random and unpredictable

9. Who generally benefits from Theta decay?

1 point

A. Long call buyers

B. Long put buyers

C. Option sellers (call or put)

D. Market makers only

10. Why did the SPY option price collapse from $10.3 to $0.2 despite volatility being constant? *

1 point

A. The stock moved ITM

B. The stock moved down and time decay accelerated

C. Volatility increased

D. The strike price changed

11. Time decay affects call options but not put options. *

1 point

True

False

12. Intrinsic value can never be negative.

1 point

True

False

13. Time decay continues even if the stock price does not move.

1 point

True

False

14. Theta represents how much an option’s intrinsic value changes daily.

1 point

True

False

15. An option with 90 days to expiration loses time value slower than one with 20 days left.

1 point

True

False

16. A trader buys a call option with 15 days to expiration. Stock price stays flat for a week. What is the MOST likely outcome?

1 point

A. Premium increases because expiration is close

B. Premium stays the same because stock didn’t move

C. Premium decreases because Theta is highest in final weeks

D. Premium increases because volatility is constant

17. A put option has Theta = -0.12. After 3 days, with no move in price or volatility, the premium should:

1 point

A. Increase by $0.12

B. Decrease by $0.36

C. Stay exactly the same

D. Increase by $0.36

18. An option seller opens a short call position 40 days before expiration. Why does time decay help them?

1 point

A. Because the stock price will automatically drop

B. Because Theta reduces the seller’s margin

C. Because decreasing extrinsic value allows them to buy back cheaper

D. Because they receive interest on the premium

19. Which option will lose extrinsic value the fastest?

1 point

A. 120-DTE ATM call

B. 75-DTE OTM put

C. 35-DTE ATM call

D. 180-DTE ITM put

20. A trader wants to avoid the steepest part of time decay. When should they buy options?

1 point

A. With less than 5 days to expiration

B. With 20–30 days to expiration

C. With 60–90+ days to expiration

D. On expiration day

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