Level 2 Final Exam · Alpha Academy

This is the final exam for Alpha Academy Level 2 — the advanced course covering Welcome to Level 2 through Case Studies: Crashes & Manias. It tests whether the Level 2 ideas actually stuck: reading the tape and order flow, market internals, volatility and the VIX, earnings and IV crush, calendar, diagonal, and butterfly structures, portfolio Greeks and hedging, the DOM and footprint charts, trading the open, swing trading, backtesting, gamma and dealer positioning, long-term investing, retirement accounts, trader taxes, and the great case studies of 2008, 2020, and GameStop.

There are 50 multiple-choice questions. Each has four answers, A through D, and exactly one best answer. The pass mark is 80% — you need at least 40 of 50 correct to pass Level 2. Take it closed book, in one sitting, and answer every question — a blank counts the same as a wrong answer, so always make your best choice.

Some questions ask for a fact. Some give you numbers and ask you to compute. Some describe a trading situation and ask for the best judgment. Work the math questions out on paper — every number you need is inside the question.

The Questions

1. What is the single biggest change Level 2 asks of a trader compared with Level 1?

A) Memorizing more chart patterns
B) Moving from "what things are" to how the market actually works underneath — flow, volatility, and positioning
C) Trading larger position sizes
D) Switching from stocks to futures only

2. On a Level 2 quote screen, the bid size at a price shows:

A) How many shares traders want to buy at that price, as resting orders
B) How many shares were sold yesterday at that price
C) The total number of shares the company has issued
D) The number of market makers quoting the stock

3. The tape (time and sales) shows:

A) Orders that traders are thinking about placing
B) Analyst price targets for the day
C) Trades that have actually executed — price, size, and time, one after another
D) The opening price of every stock on the exchange

4. In order flow, an aggressive buyer is a trader who:

A) Buys the largest number of shares
B) Places a limit order below the bid and waits
C) Crosses the spread and takes the ask price to get filled right now
D) Buys only on red days

5. Absorption is happening when:

A) A stock gaps up on earnings and never looks back
B) A market maker widens the spread
C) Volume dries up completely at lunchtime
D) The bid keeps getting hit with heavy selling, yet price refuses to fall — a large buyer is soaking it up

6. The NYSE TICK reading at any moment is:

A) The number of stocks trading above their opening price
B) The day's total share volume in billions
C) The average size of the last 100 trades
D) The number of stocks ticking up minus the number ticking down

7. The index is up 0.8% on the day, but market breadth is negative — more stocks are falling than rising. The best reading is:

A) The rally is broad and healthy
B) A few big stocks are carrying the index while most stocks weaken — treat the rally with suspicion
C) Breadth must be wrong; the index is all that matters
D) It is a guaranteed signal to short the index

8. The put/call ratio prints an extreme high reading. Level 2 teaches that this most often means:

A) Fear is extreme — historically a warning that a bounce becomes more likely, not a reason to pile into puts
B) Everyone is bullish and the top is in
C) Options have stopped trading
D) The ratio is broken and should be ignored forever

9. The VIX measures:

A) The S&P 500's price change over the last 30 days
B) The total volume of options traded yesterday
C) The implied volatility of S&P 500 index options over the next 30 days
D) The interest rate the Federal Reserve will set next

10. The VIX is at 20. Using the Level 2 rule (divide by √12 ≈ 3.46), the market is pricing roughly how much S&P 500 movement over the next 30 days?

A) About ±20%
B) About ±5.8%
C) About ±1.7%
D) About ±0.6%

11. Which statement about trading the VIX itself is correct?

A) The VIX is an index you cannot buy directly — products that track it use VIX futures, which behave differently
B) You can buy shares of the VIX like a stock
C) VIX futures always equal the VIX number exactly
D) The VIX pays a dividend

12. Long-volatility ETPs (funds that hold VIX futures) tend to lose value over time mainly because:

A) Their managers charge hidden fees of 5% a month
B) VIX futures are usually in contango, so the fund repeatedly sells the cheaper near contract and buys the more expensive next one — a steady roll cost
C) The VIX only goes down
D) They are only traded one day per month

13. A stock trades at $100 with implied volatility of 36%. Using expected move ≈ price × IV × √(days ÷ 365), the expected move over the next 7 days is about:

A) $36.00
B) $13.85
C) $3.60
D) $5.00

14. A trader buys calls the day before earnings. The stock rises 3% after the report — in the direction the trader wanted — yet the calls lose money. The main reason is:

A) The broker charged too much commission
B) Calls cannot profit when a stock rises
C) IV crush: implied volatility collapsed after the announcement, and the premium deflated faster than the price move could pay
D) Earnings reports are always bad for options

15. Before earnings, the options market is pricing a ±8% move. The stock actually moves 3%. Who does that outcome generally favor?

A) Buyers of straddles, who needed a huge move
B) Nobody — both sides always break even
C) Sellers of premium, because the move came in smaller than what was priced in
D) Only the market maker

16. A calendar spread is built with options that have:

A) The same strike and the same expiration
B) Different strikes and the same expiration
C) The same strike and different expirations
D) Different underlyings entirely

17. You buy a calendar spread for a net debit of $2.30 per share ($230 per spread). Your maximum loss is:

A) Unlimited
B) $230 — the debit you paid
C) $2,300
D) Whatever the stock does below the strike

18. A diagonal spread differs from a calendar spread because a diagonal uses:

A) Futures instead of options
B) Different expiration dates only
C) No options at all
D) Different strikes AND different expirations

19. In a standard long call butterfly (buy 1 lower strike, sell 2 middle, buy 1 higher, evenly spaced), maximum profit occurs when the stock at expiration is:

A) Exactly at the middle (center) strike
B) Far above the highest strike
C) Far below the lowest strike
D) Anywhere outside the wings

20. A call butterfly with strikes 95 / 100 / 105 costs a net debit of $1.20 per share. Its maximum profit per butterfly is:

A) $120
B) $500
C) $380 — the $5 wing width minus the $1.20 debit, times 100
D) Unlimited

21. What makes a butterfly safer than a ratio spread (for example, selling two options for every one bought)?

A) The butterfly's wings cap the loss at the debit paid, while the extra sold option in a ratio spread leaves open-ended risk
B) Butterflies use more contracts
C) Ratio spreads are illegal for beginners
D) Butterflies never lose money

22. Your three stock positions have deltas of +120, −40, and +75. Your portfolio's net delta is:

A) +235
B) +155
C) +85
D) −5

23. You hold 200 shares of a stock and sell 2 call contracts against them (each contract covers 100 shares) with a delta of 0.50 per share. Your net delta is:

A) +200
B) +100
C) −100
D) −200

24. A portfolio that is long vega heading into a week of major earnings reports will generally:

A) Gain if implied volatility rises and lose if implied volatility falls, regardless of direction
B) Only ever gain
C) Be completely unaffected by volatility
D) Lose money every single day from theta only

25. The DOM (depth of market) ladder shows:

A) Trades that already happened, arranged by price
B) Resting buy and sell orders stacked at each price level — orders waiting, not trades done
C) The opinions of analysts covering the stock
D) Next week's economic calendar

26. A footprint chart adds information a plain candlestick does not, because it shows:

A) The weather at the exchange
B) The company's earnings history
C) News headlines inside each candle
D) How much volume actually traded at each price inside the candle, split between aggressive buyers and sellers

27. Why do many Level 2 traders treat the first minutes after the 9:30 AM open with extra caution?

A) Overnight news, earnings, and queued orders all hit at once — spreads are widest and price discovery is at its most violent
B) The market is closed to retail traders until 10 AM
C) Options cannot trade in the first 30 minutes
D) The opening price is set randomly

28. A stock opens, drives straight up for 20 minutes on huge volume, then stalls at the same high three times. The Level 2 judgment is:

A) Keep buying every dip no matter what — the open drive can never fail
B) The drive was real but is now meeting sellers; a plan would tighten up, take profit, or stand aside rather than chase
C) The stock must be halted
D) Volume does not matter at the open

29. The defining risk of swing trading (holding for days) that day trading avoids is:

A) Commissions
B) Overnight and weekend gaps — price can open far beyond your stop, and a stop order cannot protect you from a gap
C) Having to watch the screen all day
D) Pattern day trader rules

30. A swing trader plans to hold through a company's earnings report. Level 2's teaching is:

A) Earnings do not affect stocks held more than one day
B) Always double the position before earnings
C) Stops always fill at the stop price, even on gaps
D) That is a decision, not an accident — the position must be sized for a gap through the stop, or closed/reduced before the print

31. A system wins 40% of the time, with an average win of +$300 and an average loss of −$150. Its expectancy per trade is:

A) +$150
B) −$30
C) +$30 — (0.40 × $300) − (0.60 × $150) = $120 − $90
D) +$60

32. Overfitting in backtesting means:

A) Testing on too little data
B) Using a computer instead of paper
C) Tuning the rules until they fit the past so precisely that they describe history instead of an edge — and fail live
D) Backtesting more than one market

33. A backtest shows a 95% win rate using the closing price of a candle to decide a trade that supposedly entered at that same candle's open. The flaw is:

A) The win rate is too low
B) Look-ahead bias — the test used information that was not available when the trade had to be placed
C) The test used too many trades
D) Candles cannot be used in backtests

34. In a positive gamma environment, dealers hedging their books tend to:

A) Buy rallies and sell dips, amplifying moves
B) Stop hedging entirely
C) Trade only after the close
D) Sell rallies and buy dips, which dampens moves and pins price

35. In a negative gamma environment, dealer hedging tends to:

A) Amplify moves — hedging chases price, so rallies and selloffs run further and faster
B) Freeze price in place all day
C) Make options free
D) Eliminate volatility

36. The gamma flip level is best described as:

A) The strike with the most open interest
B) The closing price of the previous day
C) The price level where dealer positioning flips between positive and negative gamma — above it markets tend calmer, below it wilder
D) A level that guarantees a reversal

37. A large call wall (a strike with very large call open interest) most often acts as:

A) A magnet and resistance zone — rallies tend to stall or slow into it as hedging flows lean against the move
B) A guarantee the stock must rise through it
C) A signal the stock will gap down
D) Nothing at all — open interest never matters

38. Price is below the gamma flip and implied volatility is rising. The Level 2 read is:

A) A quiet, range-bound day is most likely — size up
B) Nobody knows anything; flip a coin
C) The stock market always falls in this setup
D) A negative-gamma environment: expect wider ranges and faster moves, reduce size, and demand defined risk

39. The Level 2 investing chapters teach that a long-term investor's most reliable advantage is:

A) Predicting next week's headlines
B) Checking prices every hour
C) Concentrating everything in one hot stock
D) Time and compounding — staying invested through cycles instead of trying to jump in and out

40. Dollar-cost averaging means:

A) Investing a fixed dollar amount on a regular schedule, buying more shares when prices are low and fewer when high
B) Only buying stocks priced under one dollar
C) Averaging down on losing trades until they win
D) Converting all savings to cash every month

41. The key tax difference between a Roth IRA and a Traditional IRA is:

A) Roth accounts cannot hold stocks
B) Traditional contributions may be tax-deductible now with withdrawals taxed later, while Roth contributions are taxed now with qualified withdrawals tax-free later
C) Roth IRAs have no contribution limits of any kind
D) Traditional IRAs are only for employers

42. Before choosing between extra investing options, Level 2's retirement chapters put first:

A) Picking the perfect stock
B) Opening a margin account
C) Capturing the full employer 401(k) match — it is an immediate 100% return on that money — and remembering the IRS sets contribution limits yearly, so check the current figure
D) Day trading inside the IRA for tax-free gains

43. Under Section 1256, a $10,000 gain on index futures or SPX options is taxed as:

A) 100% short-term, no matter what
B) 100% long-term, no matter what
C) Tax-free
D) 60% long-term ($6,000) and 40% short-term ($4,000), regardless of how long you held it

44. Two more Section 1256 features taught in Level 2 are:

A) Positions are marked to market at year-end, and the wash sale rule does not apply to 1256 contracts
B) Losses can never be claimed
C) 1256 contracts are taxed only when you retire
D) The wash sale rule applies twice as hard

45. Trader tax status and the Section 475 mark-to-market election matter because:

A) For traders who qualify and elect properly, trading losses can be treated as ordinary losses without the wash sale rule — but qualification is strict and it is a professional-advice decision, not a checkbox to guess at
B) They guarantee a refund
C) Anyone can claim them with no requirements
D) They eliminate all taxes on trading

46. In the 2008 financial crisis case study, the S&P 500 fell from its October 2007 closing peak of 1,565 to its March 2009 lows by approximately:

A) −20%
B) −34%
C) −57%
D) −75%

47. In the 2020 COVID crash case study, the S&P 500 fell from its February 2020 peak to its March low by approximately:

A) −12%
B) −57%
C) −20%
D) −34%

48. In the GameStop case study, GME's intraday high in January 2021 (before the later 4-for-1 split) reached about:

A) $483
B) $120
C) $48
D) $950

49. Comparing the two great modern panics, the VIX's highest closing value was:

A) Higher in 2008 (about 80.86) than in 2020
B) Higher in 2020 (about 82.69) than in 2008 (about 80.86)
C) Identical in both crises
D) Never above 30 in either crisis

50. Breadth is weak, price sits just below the gamma flip, and implied volatility is climbing into a major data release. The best Level 2 judgment is:

A) This is a fragile, negative-gamma tape — cut size, use defined-risk structures only, or stand aside until the environment improves
B) Maximum size — volatility means opportunity with no extra risk
C) Sell naked options to collect the rich premium
D) Ignore all of it; environment never matters