Derivatives Foundation interview preparation

Questions

100

Traced to a firm

29

Firms

19

Updated

September 2026

Asked at

All firmsMSMorgan Stanley4Nomura4Akuna Capital2Amundi2HSBC2PIMCO2Bank of America1Barclays1Citadel1DRW1Goldman Sachs1Jane Street1Millennium Management1Mizuho1Old Mission Capital1RCRBC Capital Markets1Scotiabank1UBS1Wells Fargo Securities1

Topic

All topicsForwards and futures10Options basics8Option pricing7The Greeks10Volatility7Option strategies9Swaps and rates7Credit derivatives4Market structure and clearing6Indian derivatives8Trading and markets9Brainteasers6Fit9

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseMarket viewBrainteaserFit

1. 043Explain a covered call. When is it the right trade and what is the real risk?Option strategiesCorephone / first roundWealth managementIndian broking

   Say this

   Long the stock, short a call against it. You collect premium and cap your upside at the strike. It is the right trade when you are mildly bullish to neutral and would be happy to sell at the strike. The real risk is not the stock falling — it is that you have sold the upside tail, which is where most of an equity's long-run return lives.

   Then walk it

   1. Payoff: you keep the premium plus any appreciation up to the strike, and above that you deliver the stock. Below, you take the full downside less the premium you received.
   2. So it is the same payoff shape as a short put at that strike — the synthetic equivalence falls straight out of put-call parity. Anyone selling covered calls should know they are running a short-put risk profile.
   3. When it works: a range-bound stock, a high implied volatility that you think is overpriced, or a genuine intention to exit at the strike. Overwriting is also a legitimate income overlay for a mandate that has to generate yield.
   4. The honest risk: your worst outcome is being right about direction and wrong about magnitude. The stock triples, you delivered at plus 10 percent, and you have converted an asymmetric long-run payoff into a capped one. Equity index returns are driven by a small number of very large up moves, so capping them is expensive.
   5. There is also a tax and path problem in practice: getting called away triggers a realisation you may not have wanted, and rolling the short call up in a rally locks in a loss on the option leg while the stock leg is unrealised.
   6. Where I would actually use it: on a position I already intended to trim, at a strike that equals my target exit price, with the premium as a sweetener. Framing it as income on a core holding you want to keep forever is the mis-sale, and it is a very common one in retail advisory.

   Where candidates lose it

   Selling it as free income. The interviewer will ask what happens in a 40 percent rally, and the answer that gets respect is that a covered call is a short put in disguise and you have sold the fat right tail. Say the synthetic equivalence out loud.

   Expect next

   • What position is a covered call equivalent to?
   • The stock rallies 50 percent. What do you do?
   • Would you recommend a covered call programme to a long-term retirement portfolio?
2. 047Why would you buy a call spread instead of just buying a call?Option strategiesCoretechnicalIndian brokingWealth management

   Say this

   Because you have a target, not an unbounded view. Selling the higher strike funds a chunk of the premium, cuts your theta and vega, and raises your probability of profit — at the cost of capping the payoff. If your thesis is 'up 8 percent by June' rather than 'up a lot', the spread is the honest expression of it.

   Then walk it

   1. Mechanics: buy the 100 call for 5, sell the 110 call for 2, net cost 3, maximum payoff 10 at or above 110. You have turned a 5-point bleed into a 3-point bleed and a 7-point maximum gain.
   2. The Greeks get tamer. Vega and theta both shrink because you are long one option and short another, so a fall in implied volatility hurts far less. If you are worried about buying expensive volatility, the spread protects you against that.
   3. Probability of profit rises because the break-even is nearer. You need the stock at 103 rather than 105, which on a one-month view is a meaningful difference.
   4. It is also a skew trade whether you intend it or not. In an equity index the calls you sell are cheaper in implied terms than the calls you buy, so a call spread is a mildly unattractive skew position. Put spreads in equities work the other way — you sell the expensive wing.
   5. Where it goes wrong: the payoff is capped, so a takeover or a squeeze that takes the stock to 150 pays you the same 7 as a move to 110. If your thesis has a fat-tail scenario in it, the spread is the wrong structure.
   6. And near expiry a spread can be awkward to close — you may have to trade out of two legs in thin markets, or face assignment on one leg and not the other. The neat payoff diagram assumes you hold to expiry, and in practice the exit cost is real.

   Where candidates lose it

   Just saying it is cheaper. Cheaper is not a reason on its own — you paid less and you get less. The answer is about matching the structure to the shape of your view, plus the reduction in vega if you think implied volatility is high. Mention the skew direction to sound like a trader.

   Expect next

   • How does the skew affect a call spread versus a put spread in equities?
   • What if the stock gets taken over at a 50 percent premium?
   • Which leg would you close first if you wanted out early?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.