1 - Intro to Options Market Flashcards
who is the biggest user of options? what are three further users?
Retail markets
- individuals
- private businesses
- financial institutions
Why do people use options? (4 types)
risk management
- hedging
- speculation
- short selling
- leveraging opportunities
What are the features of an index option?
- option on market index
- cash settled on exercise
- used for hedging/speculating market trends
what are the features of an equity/share option?
- option on specific securities
- shared exchanged on exercise
- used for hedging/speculating individual stocks
What’s the difference between a call and a put option?
Call
-right to buy
Put
-right to sell
Whats the difference between and American and a European option?
American
- right to buy/sell on or before expiration
European
- right to buy/sell on expiration date
What is the risk premium?
The cost to buy an option
what are three features of over-the-counter options?
- customised
- private transactions
- unregulated
what is meant by long and short positions?
long- you are the taker
short- you are the writer
when is an option at the money?
S=X
when is a call option in the money?
a put?
S>X
S
when is a call option out of the money?
a put?
SX
What is the intrinsic value?
the theoretical value of the option if the maturity date were today
how must a writer of an option ensure that they can deliver if exercised against?
- cover themselves (insurance)
- maintain margin to offset uncovered position
When does the writer pay taxes?
when they receive the premium
When does a taker pay tax?
- bought as a trading asset - losses deductible during yr they occur
- bought as a hedge - option fee can be deductible (purchased on revenue account)
Are ASX traded options American or European?
European
What are the main benefits of an index option? 3
- leverage (greater exposure to ASX)
- low trading costs
- exposed only to market risk
What benefit does a share option have over an index option?
If you sell the share option you can protect yourself from a decrease in the underlying asset.
What is the difference in a short call and a long put position?
shorting is selling something you don’t own - you have the obligation to deliver the goods at pre-determined price if exercised against
long put gives you the right but not the obligation to sell at a pre-determined price on the exercise date.
writing call = premium up front
long put = paying premium up front
Why is an efficient market important to derivatives?
derivatives derive value from underlying asset - therefore its important that the underlying asset is correctly priced so that we can correctly value derivatives
What are four transaction costs of trading options?
- brokerage fees/comissions
- bid-ask spread
- admin fees (clearing house)
- exchange fee (ASX fee)
how is the tax treatment for the premium different for the writer and the taker of an option?
writer- receives premium - tax assessable
taker - pays premium - tax deductible
