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Options Trading > Basics > Flashcards

Basics Flashcards

1
Q

When I buy a call option, what have I bought?

A

The right/option to purchase the underlying asset at the strike price on the date of expiry.

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2
Q

When I buy a call option, I am hoping that…

A

The asset price goes beyond the strike price.

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3
Q

How to calculate profit on buying calls?

A

Anything above: (Strike price + Premium paid)

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4
Q

What is the maximum loss for buying call options?

A

The cost of the premium you paid to buy the option.

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5
Q

When I sell a call option, what am I agreeing to do?

A

I am collecting a credit/premium from the buyer, and I am agreeing to sell stock to the buyer at the strike price on the date of expiry.

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6
Q

When I sell a call option, I am hoping that…

A

The stock price stays below the strike price.

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7
Q

How to calculate profit for selling calls?

A

Anything below (Strike price + Premium collected)

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8
Q

What is the maximum loss for selling call options?

A

Theoretically infinite, as the stock price can go infinitely higher than the strike price.

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9
Q

When I buy a put option, I am…

A

Paying a premium for the right/option to sell stock in the future at the strike price.

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10
Q

When I buy put options I am hoping that…

A

The stock price remains below the strike price.

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11
Q

How to calculate profit on buying puts?

A

Anything below: (Strike price - Premium paid)

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12
Q

What is the maximum loss for buying put options?

A

Capped to the amount of premium paid.

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13
Q

When selling puts, I am agreeing to…

A

Collect a premium up front in exchange for agreeing to buy stock at the strike price on the expiry date.

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14
Q

When selling puts, I am hoping that…

A

Stock price remains above the strike price.

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15
Q

How to calculate profit on selling puts?

A

Anything above: (Strike price - Premium collected)

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16
Q

Maximum loss for selling puts?

A

Theoretically infinite, as stock price can go infinitely higher than strike price.

17
Q

What is Delta?

A

Change in option price for every $1 increase in stock price.

18
Q

What is Theta?

A

Time decay. Amount of premium subtracted for every day we get closer to expiry.

19
Q

What is Vega?

A

Implied Volatility. Determined by open interest.

20
Q

What is Atm?

A

At the money. Strike price is very close to current price.

21
Q

What is ITM for call options?

A

When stock price is higher than strike price.

22
Q

What is OTM for call options?

A

Out of the money. Strike price is above current stock price.

23
Q

What is ITM for puts?

A

When stock price is below strike price.

24
Q

When is OTM for puts?

A

Stock price is higher than strike price.

25
Q

What is intrinsic value?

A

When an option is ITM if it were to expire today.

26
Q

What is extrinsic value?

A

If the option were OTM if it were to expire today.

27
Q

What is the difference between a covered call and a naked call?

A

When you sell a covered call, you own the underlying shares for which you are selling the call option.
In a naked call, you sell the call option, but you don’t actually own the underlying shares.

Options Trading (1 decks)

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