Level 1 — RecognitionOptions Basics

Options Basics

⏱ 20 minutes30 marksprintable — key stays hidden on paper

Chapter: 5.2 Options Basics Level: 1 — Recognition (MCQ, Matching, True/False with justification) Time Limit: 20 minutes Total Marks: 30

Section A — Multiple Choice (1 mark each) — 10 marks

Choose the single best answer.

Q1. A call option gives the buyer the right (but not obligation) to:

(a) sell the underlying at the strike price
(b) buy the underlying at the strike price
(c) buy the underlying at the market price
(d) sell the underlying at the market price

Q2. The premium of an option is:

(a) the price paid by the buyer to the seller for the option
(b) the strike price of the option
(c) the profit the seller is guaranteed
(d) the difference between spot and strike

Q3. A call option with strike $\$ 100$ is In-The-Money (ITM) when the spot price is:

(a) $\$ 100$
(b) $\$ 95$
(c) $\$ 110$
(d) exactly at expiry only

Q4. The intrinsic value of a put option with strike $\$ 50 $when spot is$ $44$ equals:

(a) $\$ 0$
(b) $\$ 6$
(c) $\$ 44$
(d) $\$ 94$

Q5. An American-style option can be exercised:

(a) only at expiry
(b) only on the first day
(c) any time up to and including expiry
(d) never

Q6. Put-Call Ratio (PCR) based on open interest is calculated as:

(a) call OI ÷ put OI
(b) put OI ÷ call OI
(c) put volume ÷ call OI
(d) call price ÷ put price

Q7. The maximum loss for an option buyer is:

(a) unlimited
(b) the premium paid
(c) the strike price
(d) zero

Q8. An option is At-The-Money (ATM) when:

(a) spot is far above strike
(b) spot equals (or is nearest) the strike
(c) intrinsic value is maximum
(d) time value is zero

Q9. Open Interest (OI) refers to:

(a) the total number of trades in a day
(b) the number of outstanding (not yet closed) contracts
(c) the premium collected
(d) the number of expired contracts

Q10. The breakeven for a long call = strike price plus:

(a) intrinsic value
(b) premium paid
(c) time value only
(d) spot price

Section B — Matching (1 mark each) — 8 marks

Match each term in Column X with its correct description in Column Y.

#	Column X		Column Y
Q11	Strike price	A	Right to sell the underlying
Q12	Expiry	B	Price at which option can be exercised
Q13	Put option	C	Option value = intrinsic + time value
Q14	Time value	D	Last date option is valid
Q15	Assignment	E	Portion of premium above intrinsic value
Q16	Total option premium	F	Seller obligated to fulfil the contract
Q17	European style	G	Exercisable only at expiry
Q18	OTM call	H	Spot below strike (no intrinsic value)

(Write answers as Q11–…, Q12–… etc.)

Section C — True / False WITH Justification (2 marks each: 1 mark T/F, 1 mark reason) — 12 marks

Q19. "The seller (writer) of a naked call has unlimited potential loss."

Q20. "An OTM option has zero intrinsic value but can still have a positive premium."

Q21. "A PCR greater than 1 means more puts than calls are open, often read as a bearish/hedging bias."

Q22. "The buyer of a put profits when the underlying price rises well above the strike."

Q23. "At expiry, an option's time value is zero, so its price equals its intrinsic value."

Q24. "For a put option with strike $K$ , the breakeven price equals $K$ + premium."

Answer keyMark scheme & solutions

Section A — MCQ (1 mark each)

Q1 — (b) A call = right to buy at strike. (Definition of a call.)

Q2 — (a) Premium is the price the buyer pays the seller for the option right.

**Q3 — (c) $\$ 110 $.** For a call, ITM means spot > strike.$ 110 > 100$. (Intrinsic = 110−100 = 10 > 0.)

**Q4 — (b) $\$ 6 $.** Put intrinsic$ = \max(K - S, 0) = \max(50-44,0) = 6$.

Q5 — (c) American options exercisable any time up to expiry (vs European = expiry only).

Q6 — (b) PCR = put OI ÷ call OI.

Q7 — (b) Buyer's max loss = premium paid (limited risk).

Q8 — (b) ATM ⇔ spot ≈ strike.

Q9 — (b) OI = outstanding open contracts not yet closed/settled.

Q10 — (b) Long call breakeven = strike + premium.

Section B — Matching (1 mark each)

Q	Answer	Reason
Q11	B	Strike = price at which option is exercised
Q12	D	Expiry = last valid date
Q13	A	Put = right to sell
Q14	E	Time value = premium above intrinsic
Q15	F	Assignment obligates the seller to deliver/receive
Q16	C	Premium = intrinsic + time value
Q17	G	European = exercise only at expiry
Q18	H	OTM call ⇒ spot below strike, no intrinsic value

Section C — True/False with Justification (2 marks each)

Q19 — TRUE. (1) A naked call writer must deliver stock at strike no matter how high spot rises; since price can rise without limit, loss is theoretically unlimited. (1 justification)

Q20 — TRUE. (1) OTM ⇒ intrinsic value = 0, but the premium can still be positive because of time value (chance of moving ITM before expiry). (1)

Q21 — TRUE. (1) PCR > 1 ⇒ put OI exceeds call OI; commonly interpreted as bearish/hedging sentiment (though contrarian readings exist). (1)

Q22 — FALSE. (1) A put buyer profits when price falls below strike (right to sell high). A rise makes the put worthless. (1)

Q23 — TRUE. (1) At expiry no time remains, so time value = 0 and option price = intrinsic value ( $\max(S-K,0)$ or $\max(K-S,0)$ ). (1)

Q24 — FALSE. (1) For a long put, breakeven = $K - \text{premium}$ (price must fall below strike by the premium to recover cost), not $K + \text{premium}$ . (1)

[
  {"claim":"Q4: put intrinsic value strike 50 spot 44 = 6","code":"K=50; S=44; iv=max(K-S,0); result = (iv==6)"},
  {"claim":"Q3: call strike 100 spot 110 is ITM (intrinsic>0)","code":"K=100; S=110; itm = max(S-K,0)>0; result = (itm==True)"},
  {"claim":"Q10: long call breakeven strike 100 premium 5 = 105","code":"K=100; prem=5; be=K+prem; result = (be==105)"},
  {"claim":"Q24: long put breakeven = K - premium (strike 50 prem 4 = 46), not K+premium","code":"K=50; prem=4; be=K-prem; result = (be==46 and be!=K+prem)"}
]