Options explained

Q1. Which statement best describes “Call option”?

1. The strike price is the fixed price at which the option holder can buy or sell the underlying if the option is exercised.
2. Theta measures how much value an option loses each day as expiry approaches, all else equal. It works against the buyer and for the seller.
3. A straddle buys a call and a put at the same strike and expiry. It profits if the price moves a lot in either direction.
4. A call option gives the buyer the right, but not the obligation, to buy the underlying at a fixed price on or before expiry.

Q2. Which statement best describes “In-the-money (ITM)”?

1. A covered call is selling a call option against shares you already own. It earns premium but caps your gain if the price rises sharply.
2. The option buyer pays the premium and gets the right to exercise. The most they can lose is the premium, while the gain can be large.
3. An option is in the money when exercising it would give a profit relative to the market price: a call with the share above the strike, or a put with it below.
4. Implied volatility is the market’s expectation of how much the underlying will move, read from option prices. Higher implied volatility makes options more expensive.