A - D Options Terminology, The Mechanics of Trading Options

Question 1

Options Terminology

Answer 1

Options Terminology
• Call options give the owner the right to buy the underlying at the stated
strike price.
• Put options give the owner the right to sell the underlying at the stated
strike price.
• Option premium is the amount paid by the owner to the writer (issuer/seller)
for these rights
• Intrinsic value is the difference between the underlying’s price and the
strike or zero, whichever is greater.
• “Moneyness” refers to the price of the underlying relative to the strike.
 If option’s intrinsic value is positive “In-The-Money.”
 If option’s intrinsic value is negative “Out-The-Money.”

Question 2

The Mechanics of Trading Options

Answer 2

The Mechanics of Trading Options
• Options are traded on both exchanges and over-the-counter.
• Exchange-traded options place a clearinghouse between the option buyers
and writers.
• Option buyers are not required to provide margin, but option sellers might
be required to provide margin depending on the type of strategy employed.
[[[Writers of naked calls and naked puts must be able to meet their
obligation if option is exercised]]]
• American options can be exercised at any time up until expiration.
• European options can only be exercised at any expiration.
[[[American Option Prices ≥ European Option Prices]]]