Finance Quiz: Options Terminology And Payoffs
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Options Terminology And PayoffsQuestion 1 of 20

A trader writes one put option contract with a strike price of $120, receiving a premium of $6 per share. If the underlying stock price is $112 at expiration, what is the trader's total profit or loss on the position?

A loss of $800
A loss of $200
A profit of $600
A profit of $200
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Finance Quiz

Finance Quiz: Options Terminology And Payoffs

Practice Options Terminology And Payoffs in Finance with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Options Terminology And Payoffs, giving you a quick way to practice the rules, question types, and explanations that matter most for Finance.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A trader writes one put option contract with a strike price of $120, receiving a premium of $6 per share. If the underlying stock price is $112 at expiration, what is the trader's total profit or loss on the position?

  1. A loss of $800
  2. A loss of $200 (correct answer)
  3. A profit of $600
  4. A profit of $200
Explanation: As the writer of a put option, the trader is obligated to buy the stock at the strike price if the option is exercised. The payoff for a short put is −max(0,K−ST)-\text{max}(0, K - S_T). Per share, this is -\text{max}(0, \120 - $112) = -$8.Thenetprofitpershareisthispayoffplusthepremiumreceived:. The net profit per share is this payoff plus the premium received: -$8 + $6 = -$2.Foronecontract(100shares),thetotallossis. For one contract (100 shares), the total loss is -$2 \times 100 = -$200$.

Question 2

An investor buys a put option with a strike price of $45 for a premium of $2.75. At what stock price at expiration will the investor break even on the investment?

  1. $47.75
  2. $45.00
  3. $42.25 (correct answer)
  4. $40.00
Explanation: The breakeven point for a long put is the price at which the profit from exercising the option exactly covers the premium paid. The formula is: Breakeven Price = Strike Price - Premium. In this case, \45.00 - $2.75 = $42.25.Atthisprice,thepayoffis. At this price, the payoff is $45.00 - $42.25 = $2.75$, which equals the cost of the option.

Question 3

An investor's option position has a payoff profile where the maximum possible loss is limited to the premium paid, and the potential profit is unlimited. The profit increases as the underlying stock price rises. Which of the following positions does this describe?

  1. A short put
  2. A long put
  3. A short call
  4. A long call (correct answer)
Explanation: This describes the payoff profile of a long call option. The buyer's maximum loss is the premium paid if the option expires out-of-the-money. The profit potential is theoretically unlimited as the stock price can rise indefinitely, and the payoff (Stock Price - Strike Price) increases with it.

Question 4

A put option on a stock has a strike price of $90 and expires with an intrinsic value of $8. The investor who purchased the option for a premium of $3 has a net profit per share of:

  1. $3
  2. $5 (correct answer)
  3. $8
  4. $11
Explanation: An option's intrinsic value at expiration is its gross payoff. For a buyer, the net profit is the intrinsic value minus the premium paid. Therefore, the net profit per share is \8 (\text{intrinsic value}) - $3 (\text{premium}) = $5$.

Question 5

An investor purchases a call option with a strike price of $150 for a premium of $6. At expiration, the underlying stock is trading at $154. What is the financial result for the investor on a per-share basis?

  1. A net profit of $4
  2. A net profit of $10
  3. A net loss of $2 (correct answer)
  4. A net loss of $6
Explanation: At expiration, the stock price (154)isabovethestrikeprice(154) is above the strike price (150), so the option is in-the-money. The gross payoff (intrinsic value) is \154 - $150 = $4.However,theinvestorpaida$6premium.Thenetresultisthepayoffminusthepremium:. However, the investor paid a $6 premium. The net result is the payoff minus the premium: $4 - $6 = -$2$. The investor has a net loss of $2 per share, even though the option finished in-the-money.

Question 6

An investor writes a covered call by selling one call contract (strike $40, premium $2) against 100 shares of stock purchased at $38. At expiration, the stock price is $45. What is the net profit on the entire position?

  1. $200
  2. $400 (correct answer)
  3. $500
  4. $700
Explanation: The position has two parts. First, the stock profit: the stock was bought at $38 and is called away at the strike price of $40, so the stock profit is (\40 - $38) \times 100 = $200.Second,theoptionprofit:theinvestorreceiveda$2premiumpershare,andsincetheoptionwasexercised,thisistheentireprofitfromtheoptionitself,totaling. Second, the option profit: the investor received a $2 premium per share, and since the option was exercised, this is the entire profit from the option itself, totaling $2 \times 100 = $200.Thetotalnetprofitisthesumofthestockprofitandtheoptionprofit:. The total net profit is the sum of the stock profit and the option profit: $200 + $200 = $400$.

Question 7

A call option has a premium of $5. The strike price is $70, and the underlying stock is trading at $68. What are the intrinsic value and time value of this option, respectively?

  1. $0 and $5 (correct answer)
  2. $2 and $3
  3. $5 and $0
  4. $3 and $2
Explanation: When analyzing option values, remember that an option's premium consists of two components: intrinsic value (immediate profit if exercised) and time value (additional premium for potential future profit). For a call option, intrinsic value equals the greater of either (stock price - strike price) or zero. Since this stock trades at $68 and the strike price is $70, the intrinsic value is $max⁡(68−70,0)=max⁡(−2,0)=0\max(68 - 70, 0) = \max(-2, 0) = 0 $. The option is "out of the money" because the stock price is below the strike price, so there's no immediate profit from exercising. Time value equals the total premium minus intrinsic value. With a 5premiumand5 premium and 0 intrinsic value, the time value is 5 - 0 = 5 . This represents the market's assessment of the option's potential to become profitable before expiration. Answer A correctly identifies $0 intrinsic value and $5 time value. Answer B incorrectly assumes $2 intrinsic value, which would only occur if the stock were trading above the $70 strike price. Answer C reverses the components entirely, suggesting all value is intrinsic with no time premium—impossible for an out-of-the-money option. Answer D also incorrectly calculates $3 intrinsic value, again assuming the option is in-the-money. Remember this key principle: for call options, intrinsic value only exists when the stock price exceeds the strike price. When options are out-of-the-money, their entire premium consists of time value, representing the possibility of future profitability.

Question 8

A call option has a premium of $5. The strike price is $70, and the underlying stock is trading at $68. What are the intrinsic value and time value of this option, respectively?

  1. $0 and $5 (correct answer)
  2. $2 and $3
  3. $5 and $0
  4. $3 and $2
Explanation: When analyzing option values, remember that an option's premium consists of two components: intrinsic value (immediate profit if exercised) and time value (additional premium for potential future profit). For a call option, intrinsic value equals the greater of either (stock price - strike price) or zero. Since this stock trades at $68 and the strike price is $70, the intrinsic value is $max⁡(68−70,0)=max⁡(−2,0)=0\max(68 - 70, 0) = \max(-2, 0) = 0 $. The option is "out of the money" because the stock price is below the strike price, so there's no immediate profit from exercising. Time value equals the total premium minus intrinsic value. With a 5premiumand5 premium and 0 intrinsic value, the time value is 5 - 0 = 5 . This represents the market's assessment of the option's potential to become profitable before expiration. Answer A correctly identifies $0 intrinsic value and $5 time value. Answer B incorrectly assumes $2 intrinsic value, which would only occur if the stock were trading above the $70 strike price. Answer C reverses the components entirely, suggesting all value is intrinsic with no time premium—impossible for an out-of-the-money option. Answer D also incorrectly calculates $3 intrinsic value, again assuming the option is in-the-money. Remember this key principle: for call options, intrinsic value only exists when the stock price exceeds the strike price. When options are out-of-the-money, their entire premium consists of time value, representing the possibility of future profitability.

Question 9

An investor purchases one call option contract on XYZ stock with a strike price of $80 for a premium of $3.50 per share. At the expiration date, XYZ stock is trading at $88 per share. What is the investor's net profit from this position?

  1. $800
  2. $450 (correct answer)
  3. $350
  4. $1,150
Explanation: A standard option contract represents 100 shares. First, calculate the per-share payoff at expiration: \text{max}(0, S_T - K) = \text{max}(0, \88 - $80) = $8.Thenetprofitpershareisthepayoffminusthepremiumpaid:. The net profit per share is the payoff minus the premium paid: $8.00 - $3.50 = $4.50.Foronecontract,thetotalnetprofitis. For one contract, the total net profit is $4.50 \times 100 = $450$.

Question 10

An options writer sells a call option with a strike price of $210 for a premium of $7.50. The position will become unprofitable for the writer if the stock price at expiration is above what level?

  1. $202.50
  2. $210.00
  3. $217.50 (correct answer)
  4. $225.00
Explanation: The breakeven point for a short call writer is the strike price plus the premium received. Breakeven Price = Strike Price + Premium = \210.00 + $7.50 = $217.50$. Above this price, the loss from the obligation to sell the stock will exceed the premium received, resulting in a net loss for the writer.

Question 11

An investor realizes a net loss of $150 on a single long put contract (100 shares). If the stock price at expiration was $32 and the strike price was $35, what was the premium paid per share for the option?

  1. $1.50
  2. $3.00
  3. $4.50 (correct answer)
  4. $3.50
Explanation: First, find the per-share loss: \150 / 100 \text{ shares} = $1.50losspershare.Next,findthegrosspayoffpershareatexpiration:loss per share. Next, find the gross payoff per share at expiration:\text{Payoff} = K - S_T = $35 - $32 = $3.00.Thenetprofitformulais. The net profit formula is \text{Profit} = \text{Payoff} - \text{Premium}.Wecanrearrangethistosolveforthepremium:. We can rearrange this to solve for the premium: \text{Premium} = \text{Payoff} - \text{Profit}.Substitutingthevalues:. Substituting the values: \text{Premium} = $3.00 - (-$1.50) = $3.00 + $1.50 = $4.50$.

Question 12

An investor buys one put option contract on ABC Corp for $4.00 per share. The strike price is $95. Shortly before expiration, with the stock trading at $85, the investor closes the position. What is the approximate percentage return on this investment?

  1. -10.5%
  2. 150% (correct answer)
  3. 250%
  4. 60%
Explanation: The initial investment is the total premium paid for one contract: \4.00/\text{share} \times 100 \text{ shares} = $400.Atexpiration,theputisin−the−money.Thepayoffpershareis. At expiration, the put is in-the-money. The payoff per share is K - S_T = $95 - $85 = $10.Thenetprofitpershareis. The net profit per share is $10 - $4 = $6.Thetotalnetprofitis. The total net profit is $6 \times 100 = $600.Thereturnoninvestmentis(NetProfit/InitialInvestment)=. The return on investment is (Net Profit / Initial Investment) = $600 / $400 = 1.5$, or 150%.

Question 13

An options trader's position on a single contract resulted in a net profit of $150. This profit was realized when the underlying stock finished at $48 per share at expiration, which was below the option's strike price of $53. The premium for the option was $3.50 per share. Which position did the trader hold?

  1. Long one put contract (correct answer)
  2. Short one call contract
  3. Short one put contract
  4. Long one call contract
Explanation: When analyzing options profits at expiration, you need to determine which position would generate the stated profit given the stock price relative to the strike price. Since the stock finished at $48, below the $53 strike price, any call options are worthless while put options have intrinsic value. For a long put position (A), you have the right to sell at $53 when the stock is worth $48, giving you an intrinsic value of $5 per share. Since you paid a $3.50 premium, your net profit is $5.00 - $3.50 = $1.50 per share, or $150 per contract (100 shares). This matches the stated profit exactly. Looking at the wrong answers: (B) Short one call contract would generate a profit of only $350 (the premium collected) since the call expires worthless, which is too high. (C) Short one put contract would result in a loss of $150 because you'd collect $350 in premium but be assigned to buy stock worth $48 for $53, losing 500inintrinsicvalue(500 in intrinsic value (350 - 500=−500 = -150). (D) Long one call contract would result in a total loss of $350 since the call expires worthless when the stock is below the strike price. Study tip: When working through options problems, always calculate the intrinsic value first (the difference between stock price and strike for in-the-money options), then subtract premiums paid or add premiums received. Remember that puts gain value when stock prices fall below the strike, while calls gain value when stock prices rise above the strike.

Question 14

An investor buys a put option with a strike price of $180 for a premium of $5.50. The option expires when the underlying stock price is $182. What is the investor's net profit or loss per share?

  1. A profit of $2.00
  2. A loss of $3.50
  3. A loss of $5.50 (correct answer)
  4. A loss of $7.50
Explanation: At expiration, the stock price (182)isabovethestrikeprice(182) is above the strike price (180). This means the put option is out-of-the-money and expires worthless. The payoff is $0. The investor's net loss is the full premium paid for the option, which is $5.50 per share.

Question 15

An investor realizes a net loss of $150 on a single long put contract (100 shares). If the stock price at expiration was $32 and the strike price was $35, what was the premium paid per share for the option?

  1. $1.50
  2. $3.00
  3. $4.50 (correct answer)
  4. $3.50
Explanation: First, find the per-share loss: \150 / 100 \text{ shares} = $1.50losspershare.Next,findthegrosspayoffpershareatexpiration:loss per share. Next, find the gross payoff per share at expiration:\text{Payoff} = K - S_T = $35 - $32 = $3.00.Thenetprofitformulais. The net profit formula is \text{Profit} = \text{Payoff} - \text{Premium}.Wecanrearrangethistosolveforthepremium:. We can rearrange this to solve for the premium: \text{Premium} = \text{Payoff} - \text{Profit}.Substitutingthevalues:. Substituting the values: \text{Premium} = $3.00 - (-$1.50) = $3.00 + $1.50 = $4.50$.

Question 16

An investor purchases one call option contract on XYZ stock with a strike price of $80 for a premium of $3.50 per share. At the expiration date, XYZ stock is trading at $88 per share. What is the investor's net profit from this position?

  1. $800
  2. $450 (correct answer)
  3. $350
  4. $1,150
Explanation: A standard option contract represents 100 shares. First, calculate the per-share payoff at expiration: \text{max}(0, S_T - K) = \text{max}(0, \88 - $80) = $8.Thenetprofitpershareisthepayoffminusthepremiumpaid:. The net profit per share is the payoff minus the premium paid: $8.00 - $3.50 = $4.50.Foronecontract,thetotalnetprofitis. For one contract, the total net profit is $4.50 \times 100 = $450$.

Question 17

A trader writes one put option contract with a strike price of $120, receiving a premium of $6 per share. If the underlying stock price is $112 at expiration, what is the trader's total profit or loss on the position?

  1. A loss of $800
  2. A loss of $200 (correct answer)
  3. A profit of $600
  4. A profit of $200
Explanation: As the writer of a put option, the trader is obligated to buy the stock at the strike price if the option is exercised. The payoff for a short put is −max(0,K−ST)-\text{max}(0, K - S_T). Per share, this is -\text{max}(0, \120 - $112) = -$8.Thenetprofitpershareisthispayoffplusthepremiumreceived:. The net profit per share is this payoff plus the premium received: -$8 + $6 = -$2.Foronecontract(100shares),thetotallossis. For one contract (100 shares), the total loss is -$2 \times 100 = -$200$.

Question 18

An investor's option position has a payoff profile where the maximum possible loss is limited to the premium paid, and the potential profit is unlimited. The profit increases as the underlying stock price rises. Which of the following positions does this describe?

  1. A short put
  2. A long put
  3. A short call
  4. A long call (correct answer)
Explanation: This describes the payoff profile of a long call option. The buyer's maximum loss is the premium paid if the option expires out-of-the-money. The profit potential is theoretically unlimited as the stock price can rise indefinitely, and the payoff (Stock Price - Strike Price) increases with it.

Question 19

An investor buys one put option contract on ABC Corp for $4.00 per share. The strike price is $95. Shortly before expiration, with the stock trading at $85, the investor closes the position. What is the approximate percentage return on this investment?

  1. -10.5%
  2. 150% (correct answer)
  3. 250%
  4. 60%
Explanation: The initial investment is the total premium paid for one contract: \4.00/\text{share} \times 100 \text{ shares} = $400.Atexpiration,theputisin−the−money.Thepayoffpershareis. At expiration, the put is in-the-money. The payoff per share is K - S_T = $95 - $85 = $10.Thenetprofitpershareis. The net profit per share is $10 - $4 = $6.Thetotalnetprofitis. The total net profit is $6 \times 100 = $600.Thereturnoninvestmentis(NetProfit/InitialInvestment)=. The return on investment is (Net Profit / Initial Investment) = $600 / $400 = 1.5$, or 150%.

Question 20

An investor purchases a call option with a strike price of $150 for a premium of $6. At expiration, the underlying stock is trading at $154. What is the financial result for the investor on a per-share basis?

  1. A net profit of $4
  2. A net profit of $10
  3. A net loss of $2 (correct answer)
  4. A net loss of $6
Explanation: At expiration, the stock price (154)isabovethestrikeprice(154) is above the strike price (150), so the option is in-the-money. The gross payoff (intrinsic value) is \154 - $150 = $4.However,theinvestorpaida$6premium.Thenetresultisthepayoffminusthepremium:. However, the investor paid a $6 premium. The net result is the payoff minus the premium: $4 - $6 = -$2$. The investor has a net loss of $2 per share, even though the option finished in-the-money.