Ive been going on and on about covered calls for quite a while. Lets see how much of the material youve retained. Take the following quiz and it will give you a good idea on how much youve absorbed and how close you are to being ready to test your skills in the option market.
1. To trade a covered call, your feeling about the stock should be: a) bullish; b) neutral to bullish; c) neutral; d) neutral to bearish; e) bearish
2. You can only sell covered calls on stock that you own. True or False?
3. You are allowed to sell covered calls in your IRA or 401K accounts. True or False.
4. I want to sell a call that is: a) in the money; b) out of the money; c) at the money.
5. If XYZ stock cost me $18.50 and I sold the $20 call for $1.00, my cost basis for the stock is: a) $17.50; b) $18.50; c) $19.50; d) none of the above
6. My potential profit per share for the covered call position (see example in question five) is: a) $2.50; b) $1.00; c) $1.50; d) $2.00
7. If XYZ were to go down, the breakeven point for the XYZ stock would be: a) $18.50; b) $18.00; c) $16.50; d) $17.50; e) none of the above.
8. If XYZ, at expiration, is $19.25, my profit per share would be: a) $.75; b) $.65; c) $.85; d) $.95
9. If XYZ, at expiration, closes at $19.75, the short $20 call would: a) be exercised; b) expire worthless; c) be rolled into the $20 call for the next month.
10. The risk graph for a covered call is the same as for a: a) bear call spread; b) naked call; c) bull put spread; d) naked put.
11. If XYZ, at expiration, closes at $22.15, my shares will be called away from me at: a) $19.50; b) $22.15; c) $20.00; d) $21.00
12) My potential maximum return on the above covered call position is: a) 14.5%; b) 13.5%; c) 12.5%; d) 12%
13. If XYZ, at expiration, closes at $19.25, I can: a) sell my stock; b) buy more stock; c) sell a call for the next month; d) buy a put; e) all of the above
14. If XYZ, at expiration, closes at $15.25, your loss on the entire covered call position for that month was: a) $2.25; b) $4.50; c) $3.25; d) $2.50; e) none of the above
15. With a Buy-Write order, you: a) buy the stock and buy a call; b) short the stock and sell a call; c) buy the stock and sell the call; d) sell the stock and sell the call.
16. With a Buy-Write order, the stock and option orders are placed: a) first the stock, then the option; b) first the option, then the stock; c) simultaneously; d) all of the above
17. Im going to run out now and start selling covered calls because I think I know what Im doing; True or False
18. If I lose money, Im going to blame: a) my broker; b) the stock; c) options; d) my dog; e) anything else I can think of; f) all of the above
Who Is This Guy? --
For serious option traders, Mike also offers a comprehensive advanced two-day seminar covering many fascinating and profitable non-directional strategies.
Over the years, he has learned from his mistakes, and the mistakes of others, and he's here to share his wisdom with you. "Trading is as much psychological as it is skill," says Mike. "Keep an open mind. You never know what might find its way in there."
Answers To Above Quiz: