Ch. 9 Options Flashcards
Buyer/Holder
Long position
Can exercise or not
Pays premium
Bought a “right”
Established with a debit
Seller/Writer
Short position
Assigned “if contract exercises”
Gets premium $
Sold an Obligation
Established with a credit
“Long Call” holder right is?
right to “buy” at strike price
“Short Call” writer obligation is?
obligation to “sell” at strike price IF EXERCISED
Why would a holder buy a call?
bc trader “expects” price to “rise”
“Long Put” holder right is?
right to “sell” at strike price
“Short Put” writer obligation is?
obligation to “buy” at strike price IF EXERCISED
Why would a put be bought?
bc trader “expects” price to “fall”
Premium
price of contract that buyer pays
Strike Price
aka “XP” - the price the option may be exercised at
Calculation to find Premium Price
of contracts * Price * 100 shares
OCC
Options Clearing Corp. issue, clear, settles options trading
1 ABC Jan 40 Call @ 5
1 =
of contracts
1 ABC Jan 40 Call @ 5
Jan =
Expiration Month
1 ABC Jan 40 Call @ 5
40 =
Strike price
1 ABC Jan 40 Call @ 5
Call =
Type of option
1 ABC Jan 40 Call @ 5
5 =
Premium price per share
How many shares are in one contract?
100 shares
1 ABC Jan 40 Call @ 5 means…
Buyer has right to buy 100 shares of ABC at $40/share
1 ABC Jan 40 Call @ 5 total right cost is?
$500 (premium) 5*100
3 things options can do?
traded, exercised, expire
When do options trading and exercising settle?
T+1
Scenario (buyer effect): Option expires
buyer loses premium paid (max loss)
Scenario (seller effect): Option expires
seller gains premium payment (max gain)
