Basics

Question 1

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

Answer 1

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

Question 2

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

Answer 2

The asset price goes beyond the strike price.

Question 3

How to calculate profit on buying calls?

Answer 3

Anything above: (Strike price + Premium paid)

Question 4

What is the maximum loss for buying call options?

Answer 4

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

Question 5

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

Answer 5

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.

Question 6

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

Answer 6

The stock price stays below the strike price.

Question 7

How to calculate profit for selling calls?

Answer 7

Anything below (Strike price + Premium collected)

Question 8

What is the maximum loss for selling call options?

Answer 8

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

Question 9

When I buy a put option, I am…

Answer 9

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

Question 10

When I buy put options I am hoping that…

Answer 10

The stock price remains below the strike price.

Question 11

How to calculate profit on buying puts?

Answer 11

Anything below: (Strike price - Premium paid)

Question 12

What is the maximum loss for buying put options?

Answer 12

Capped to the amount of premium paid.

Question 13

When selling puts, I am agreeing to…

Answer 13

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

Question 14

When selling puts, I am hoping that…

Answer 14

Stock price remains above the strike price.

Question 15

How to calculate profit on selling puts?

Answer 15

Anything above: (Strike price - Premium collected)

Question 16

Maximum loss for selling puts?

Answer 16

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

Question 17

What is Delta?

Answer 17

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

Question 18

What is Theta?

Answer 18

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

Question 19

What is Vega?

Answer 19

Implied Volatility. Determined by open interest.

Question 20

What is Atm?

Answer 20

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

Question 21

What is ITM for call options?

Answer 21

When stock price is higher than strike price.

Question 22

What is OTM for call options?

Answer 22

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

Question 23

What is ITM for puts?

Answer 23

When stock price is below strike price.

Question 24

When is OTM for puts?

Answer 24

Stock price is higher than strike price.

Question 25

What is intrinsic value?

Answer 25

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

Question 26

What is extrinsic value?

Answer 26

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

Question 27

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

Answer 27

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.