A,B,C Flashcards
describe call and put options; distinguish between European and American options; define the concept of moneyness of an option;
Describe Call Options
‘Call’ to buy the ‘underlying’ at exercise or strike for a specified period of time
Describe Put Options
‘Put’ to sell the ‘underlying’ at exercise or strike for a specified period of tim
Option Contract
A right but not legal obligation to exercise a strike
Buyers decide whether or not the trade takes place
Sellers are obliged to if the buyer exercises
A right, but not legal obligation to buy/sell a share at a pre-determined price. You pay a premium to purchase a call option which allows you the right to buy an underlying ASSET at the exercise price
Exercise date
Contracts an option to a predetermined date, or price (in regards to exercise price)
Exercise price, Strike price
The price at which an underlying asset will be bought/sold if the option is exercised
The four possible options positions
For every owner of an option there must be a seller
Long Calls buy (rights)
Short Calls write (obligation)
Put buyer: Long position - has the right to sell the put
Put Writer: short position- has the obligation to buy underlying at the exercise price in the event that the option is exercised
To acquire ‘rights to buy’, buyers must
pay the option premium to the seller
Stock option contracts after issuance are adjusted for splits but not
cash dividends
The owners of the option decides…
…whether or not to exercise the option
European Options
Can be exercised ONLY on the contracts expiration date
American Options
May be exercised at any time up to and including the contracts expiration date
American v. Euro options
Before expiration = different
At expiration = same
Also, American options will equal or exceed Euro option values because of the flexibility in exercise
Define the concept of ‘Moneyness’ in an option
In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a three-fold classification: if the derivative would make money if it were to expire today, it is said to be in the money, while if it would not make money it is said to be out of the money, and if the current price and strike price are equal, it is said to be at the money. There are two slightly different definitions, according to whether one uses the current price (spot) or future price (forward), specified as “at the money spot” or “at the money forward”, etc.
