# Trading Options: TD Ameritrade Options Quiz 3 of 6

*Chris does online trading during the week; this is one reason he and his family enjoy life and each other. He hopes this helps you.*

## Stock Options: Lesson Three of Six

Lesson three in the Ameritrae stock options education center goes over reading charts in order to understand the dynamics and possibilities of stock options. By understanding the concepts of stock options, you can begin to understand which contracts are riskier than others and which have less risk.

This lesson continues into more detail and explains several strategies for trading with stock options. These three are:

- Income-Based Options Strategies
- Spread Options Strategies
- Advanced Option Strategies

This quiz has a lot of profiles within it. Be ready to look at many charts and understand the concepts of "bullish," "bearish," and "neutral."

DisclaimerPlease do not use this article to cheat, that is, to obtain the options course certificate without understanding the lessons TD Ameritrade presents. Make sure you really understand options trading before you start trading with money. If you don't, you could put yourself in a negative financial situation that could harm you for years to come. If you are new to trading, I would suggest paper trading for a bit before using real money.

## Questions About Risk Profiles

The quiz begins with some questions about risk profiles.

**Based on this risk profile [below], what would be the outcome of the trade** if the price of the underlying stock rose significantly, not including commissions and fees?

- Profits would increase without limit.
**Losses would increase without limit. - Correct**- Profits would be limited.
- Losses would be limited.

Looking at the graph shows us that as the price of the underlying stock increases, the profit decreases until we have a loss when the underlying stock reaches the price of $54.00 and there is no leveling off. As the price continue to increase, or losses will increase.

The dotted line represents the break even price for the underlying stock. When the line is above this, we make money, where they intersect is where we break even, and below it we are losing money. This does not include commissions and/or fees.

**Based on this risk profile [below], what would be the outcome of the trade** if the price of the underlying stock rose significantly, not including commissions and fees?

- Profits would be limited.
**Losses would increase without limit. - Correct**- Losses would be limited.
- Profits would increase without limit.

The diagram shows that the arrows continue on as a ray - which means there isn't an end to them. So as the underlying stock price increases, the loss increases as well. This is an example of you could earn a limited profit but have losses that are limitless. Limiting your losses is a key to investing and trading.

**Based on this risk profile [below], what would be the outcome of the trade** if the price of the underlying stock rose significantly, not including commissions and fees?

- Profits would increase without limit.
- Losses would increase all the way to zero.
**Profits would be limited. - Correct**- Losses would be limited.

From these four choices, the profits would be limited because of the plateau from $87.00 and up. Profit would be capped at $500.00.

It should be noted that there is a limit to loss with this risk profile as well. $83.00 and under would have a max loss at $600.00.

**Based on this risk profile [below], what would be the outcome of the trade** if the price of the underlying stock rose significantly, not including commissions and fees?

- Losses would be limited.
**Losses would increase without limit. - Correct**- Profits would be limited.
- Profits would increase without limit.

Once the underlying stock price passes $108.00, you would begin to lose money from the profit plateau. At the $109.00 price point, the profit/loss would be $0.00 and continue to drop and beginning to lose money from this point on.

With this profile, you would be looking for the underlying stock to be between $102.00 and $108.00 for maximum profit.

**Based on this risk profile [below], what would be the outcome of the trade** if the stock price was $100 at expiration, not including commissions and fees?

**Partial loss - Correct**- Max loss
- Max gain
- Partial gain

If you look at the x-axis and see that 100 is the first number, following that up, you should note that you would have a **partial loss of just under $250.00**.

This is a neutral bias profile and you would have wanted the underlying price to fall between $102 and $108 to maximize your profit.

## Questions About the Bias of a Trade

Next come some questions about risk profile and bias.

**Based on this risk profile [below], what is the bias of this trade?**

- Neutral
- Bearish
**Bullish - Correct**

The reason this is a bullish bias and not a neutral is because it goes up and levels off but does not come back down as a neutral bias would.

Because of this upwards with no downward return, it is a bullish bias.

**Based on this risk profile [below], what is the bias of this trade?**

- Bearish
- Bullish
**Neutral - Correct**

The bear swipes down and the bull spears upwards. These are the two most prominent symbols in the stock market. A bearish market means it is going down. A bullish market means that the market is making gains.

A neutral bias is simply a plateau. If the underlying price is low, you lose money and if the underlying price is high, you lose money as well.

**Based on this risk profile [below], what is the bias of this trade?**

**Bearish - Correct**- Bullish
- Neutral

This is not as familiar as with other profiles, but as the underlying stock goes up, you would enter into a loss. This would be a profile you want to avoid, but an easy thought would be if a person purchased a put option contract.

**Based on this risk profile [below—the "bullish bias"], what is the bias of this trade?**

- Neutral
- Bearish
**Bullish - Correct**

This is the classic bullish bias profile. As the stock price increases, so does the profit. The profile shown is one that everyone should know who is remotely thinking about the stock market.

**Based on this risk profile [below, "bearish bias"], what is the bias of this trade?**

- Bullish
- Neutral
**Bearish - Correct**

This is the other classic profile in the stock market, the bearish bias. This is where there is a decline in profit. To review, a bullish bias means that the profit goes up, a bearish means profit goes down, and neutral means that profits can go up and down depending on the underlying position.

**Based on this risk profile [below], what is the bias of this trade?**

- Neutral
**Bullish - Correct**- Bearish

Profit goes up as the price of the underlying goes up.

**Based on this risk profile [below], what is the bias of this trade?**

**Neutral - Correct**- Bullish
- Bearish

A pyramid or plateau shape means it is neutral. These bias profiles are a topic that Ameritrade wants to beat into your head.

**Based on this risk profile [below], what is the bias of this trade?**

**Bearish - Correct**- Neutral
- Bullish

Profits are going down, therefore it is bearish. When the bear attacks the bear swipes down.

**If you're selling a call, what is your bias?**

**Bearish - Correct**- Neutral
- Bullish

Be selling a call you want essentially telling the broker to sell stocks it owns and you will replace them at a later time. So if you have them sell 100 shares of L stock and the price is currently $1.00. You owe them 100 shares to replace those shares. What you want to happen is the price to fall, and you purchase 100 shares of L for a lower price - let's say 50¢. You get to keep the difference, in this case, 50¢ per share. The broker has its 100 shares back and you have $50.00 (minus commissions and fees).

The risk is if L stock jumps in price, you lose money because you have to replace those 100 shares. So if the price jumped to $2.00 a share, you have to purchase those 100 shares for $200 (plus commissions and fees) and lose $100.00 because the price went up and you had to replace those 100 shares.

To answer the questions, since you want the price of the stock to go down, that is bearish.

**If you're buying a put, what is your bias?**

**Bearish - Correct**- Bullish
- Neutral

Your bias would be bearish. What happens is you are paying for the write to sell at a certain price. If you purchased a put contract saying you have the option to sell 100 (contracts represent 100 shares) shares of X stock. The current price of the stock is $75.00 and you have a strike price of $50.00. You want the price to drop below $50 - commission and fees. You will need to know what your brokerage firm charges per share and the fees.

If the price per share fell to $20.00, you have the option to sell each share for $50.00. You would profit from the underlying stock price dropping. The more it drops the more you would make.

**If you're selling a put, what is your bias?**

- Neutral
**Bullish - Correct**- Bearish

By selling a put option, you are selling someone the right to make you purchase shares at the strike price by the expiration date. If you are selling a put at the strike price of $10.00 but the stock jumps to $30.00 a share, that person is not going to have you purchase those stocks for the $10.00 a share that the contract agrees to. If they did, you would sell and gain the difference.

## Questions About Trade Outcomes

Next come some questions about risk profile and trade outcome.

**Based on this risk profile [below], what would be the outcome of the trade** if the stock price was $55 at expiration, not including commissions and fees?

This is a partial loss, because there is no limit to how much you could lose and $55.00 gives you a plot of how much you did lose. This makes it a partial loss because you know how much you lost. If the underlying stock price ended up being $100.00 you would have lost even more money, and if the underlying was $200 you would have lost even more money.

**Partial loss - Correct**- Max loss
- Max gain
- Partial gain

**Based on this risk profile [below], what would be the outcome of the trade** if the stock price was $108 at expiration, not including commissions and fees?

- Max loss
- Partial loss
- Max gain
**Partial gain - Correct**

If you look closely, the $108 is just after the downturn. Very close to max profit, but a couple of cents off most likely. This is not always a bad thing. Several days ago, I bought stock for 2¢ more than the lowest price of the day and sold it for 1¢ lower than the highest price for the day. I made just under 20% on that transaction and was happy with it, your goal in trading is to make a profit. Don't miss opportunities because you want to buy at the absolute lowest and sell at the absolute highest.

**Based on this risk profile [below], at what underlying prices would this trade break even**, not including commissions and fees? Select all that apply.

- 105
**102 - Correct**- 100
**108 - Correct**

**Based on this risk profile, at what underlying prices would this trade break even**, not including commissions and fees? Select all that apply.

Since this is a neutral bias or a pyramid, there are two points that cross the break-even point. To make a profit you would want to sell between these two points, in this example.

**101 - Correct****109 - Correct**- 104
- 108

Where the previous question had a pyramid shape and was neutral bias, this is neutral bias and has a plateau shape. There are two break-even points again because of the neutral bias.

**Based on this risk profile [below], what would be the outcome of the trade if the price of the underlying stock fell to zero**?

- Profits would increase without limit.
- Profits would be limited to the credit received for selling the option.
- Losses would increase all the way to zero.
**Losses would be limited to the premium paid for the position, plus transaction costs. - Correct**

** **

The stock price can only go to $0.00 and from the chart you can see that loss does have a bottom to it. You would lose that much plus the premium cost and any fees from your broker and trade commission.

**Based on this risk profile [below], what would be the outcome of the trade if the stock price was $86** at expiration, not including commissions and fees?

**Partial gain - Correct**- Max gain
- Partial loss
- Max loss

$86 is on the hill above the break-even point. Therefore, you would be making a profit but it isn't to the max profit line - so you would be making a partial profit.

**Based on this risk profile, what would be the outcome of the trade if the price of the stock was 195** at expiration?

- Loss
**Max gain - Correct**- Partial gain
- Break even

If the stock price was $195 at expiration, then you would make the maximum possible profit for this transaction. If the stock was between $0 and about $204, you would make max profit of around $900.

Once the stock price went above approximately $204, the profit would decrease to zero with a stock price of about $210 and then you would start to lose money after that.

**Based on this risk profile, at what underlying price would this trade break even**, not including commissions and fees?

**41 - Correct**- 42
- 40
- 43

Breaking even means that you are not making a profit or loss. You are looking for the point that profit/loss is at $0 and finding where the stock price intersects this. In this case, it would be a stock price of $41 would have an earnings of $0.

**Based on this risk profile, what would be the outcome of the trade if the stock price was $53** at expiration, not including commissions and fees?

- Max loss
- Partial loss
**Partial gain - Correct**- Max gain

If the stock was $53 at expiration, then the profit would be at the beginning of a downward trend in profit. This means that you would have just missed the max profit and would be making a partial profit.

**Based on this risk profile, what would be the outcome of the trade if the stock price was at $41.50** at expiration, not including commissions and fees?

- Break even
- Max gain
- Loss
**Partial gain - Correct**

$41.50 is just before the max profit line. But since it is before, that means you would be making a partial profit. Again, there is absolutely nothing wrong with making partial profit. If you are in the green, that is the goal.

**Based on this risk profile, what would be the outcome of the trade if the price of the underlying stock rose significantly?**

- Profits would increase without limit.
- Profits would be limited.
- Losses would increase all the way to zero.
**Losses would be limited. - Correct**

With this profile, the best you can have is limited profit if the price stayed low or limited loss if the price continues to rise. So if there was a significant rise in price, you would have a limited loss.

**Based on this risk profile [below], what would be the outcome of the trade if the underlying stock fell to zero?**

- Profits would increase without limit.
**Losses would continue to increase until the stock price hit zero. - Correct**- Profits would be limited to the credit received for selling the option.
- Losses would be limited to the cost of the premium.

If the stock price fell to zero, you would have a loss until that point. Since a stock can't fall below the price of $0, this is where the loss would end.

**Based on this risk profile, at what underlying price would this trade break even?**

- 800
- 204
**210 - Correct**- 0

A bearish bias, it is good to know when you will be breaking even. On this profile, follow the dotted line from $0 to the right until you hit the ray and follow that down to the stock price - $210 in this case. One of the most important things about trading is knowing when to get out i.e. how to limit your loss.

**Based on this risk profile, what would be the outcome of the trade if the stock price was $109** at expiration, not including commissions and fees?

- Partial gain
- Max loss
**Partial loss - Correct**- Max gain

A partial loss is correct because if the price continued to rise you would lose more. With this profile, you have between $102 and $108 underlying value to break even or make a profit. Anything less than $102 or more than $108 and you are at a loss. The loss is limitless and the profit is capped.

**Based on this risk profile, what would be the outcome of the trade if the stock price was $90** at expiration, not including commissions and fees?

- Max loss
**Max gain - Correct**- Partial loss
- Partial gain

If you follow the line up from $90, you would be at the upper plateau - making the max gain or profit possible with this profile.

**Based on this risk profile, what would be the outcome of the trade if the stock price was $105** at expiration, not including commissions and fees?

- Max loss
- Partial loss
**Max gain - Correct**- Partial gain

$105 places your investment directly in the middle of the chart ending with a maximum gain or profit.

Now based on the risk profile below, **what would be the outcome of the trade if the stock price was $105 at expiration**, not including commissions and fees?

- Partial loss
- Max loss
- Partial gain
**Max gain - Correct**

$105 is the exact price that you would need to make max gain. Most of these profiles should be fairly straight forward for you to determine what the outcome will be from a stated price.

**Based on this risk profile, what would be the outcome of the trade if the stock price was $81** at expiration, not including commissions and fees?

- Partial gain
- Partial loss
- Max gain
**Max loss - Correct**

If the underlying was at $81 at expiration, you would have had max loss. One of the few positives to this is that you would have limited the amount of loss that could occur.

**Based on this risk profile, what would be the outcome of the trade if the underlying stock fell to zero**, not including commissions and fees?

- Profits would be limited.
**Losses would be limited. - Correct**- Profits would increase without limit.
- Losses would increase all the way to zero.

From $83 to $0, the loss would be the same and it would be limited. If there is a horizontal line then there is a limit.

**Based on this risk profile, at what underlying price would this trade break even**, not including commissions and fees?

- 86
- 88
**85 - Correct**- 84

If you follow the dotted line across to where the lines intersect, you will see that the break-even point is $85.00.

**Based on this risk profile, what would be the outcome of the trade if the stock price was at $45** at expiration, not including commissions and fees?

- Loss
**Max gain - Correct**- Partial gain
- Break even

If you follow the line up from $45, you will note that you have earned the max gain. These profiles are simple to understand and are so plentiful in the quiz that you should have learned to read them and understand what they are saying very quickly.

**Based on this risk profile, what would be the outcome of the trade if the underlying stock rose significantly?**

- Profits would increase without limit.
**Profits would be limited to the credit received for selling the option. - Correct**- Losses would be limited to the cost of the premium.
- Losses would increase all the way to zero.

This is simply an example that with great increase in the underlying price, that you would have limited gains and those gains plateau. These styles may not always be the most fun, but limiting your loss and taking a controlled risk is how people make a profit in the long run.

**Based on this risk profile, what would be the outcome of the trade if the underlying stock fell to zero,** not including commissions and fees?

**Profits would be limited. - Correct**- Losses would increase all the way to zero.
- Profits would increase without limit.
- Losses would be limited.

If the underlying stock fell to $0.00, you would gain your max gain. This gain would be limited

**Now based on this risk profile, what would be the outcome if the underlying stock fell to zero?**

**Profits would be limited. - Correct**- Profits would increase without limit.
- Losses would be limited.
- Losses would increase all the way to zero.

It is clear that this is limited because the line becomes a flat horizontal line. If it continued to climb or dive then it would not have a limit. This will be the last test example of this type. We have already had many of these questions and do not need to continue on with them.

## Questions About Option Chains

The test also has questions about option chains—many more than I was able to reproduce here.

**Given this option chain, what expiration would you select** if you wanted to trade an option close to 40 days to expiration?

- 15 JUL 16
**1 JUL 16 - Correct**- 19 AUG 16
- 24 JUN 16

The stated option chain expires in 37 days, this is the closest option chain expiration for the desired 40-day number.

## Repetitive Type Questions

This test has so many repetitive type questions that I am not showing approximately half the questions/answers that I have for this section. I do not want to be overly spammy with this guide and it was slightly beyond that point, in my opinion. If you do not understand a question from the test that I have not posted, you are free to ask in the comments section - but I would be hesitant if you do not understand it after looking through this guide for a similar question and answer.

*This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.*

**© 2021 Chris Andrews**