Ch. 9 Options AI Flashcards
What is an option in financial terms?
An option is a financial derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price before a certain date.
True or False: An option gives the holder the obligation to buy or sell an asset.
False
What are the two main types of options?
Call options and put options.
Fill in the blank: A ______ option gives the holder the right to buy the underlying asset.
call
Fill in the blank: A ______ option gives the holder the right to sell the underlying asset.
put
What is the strike price of an option?
The strike price is the price at which the holder can buy or sell the underlying asset.
What does it mean when an option is ‘in the money’?
An option is ‘in the money’ when exercising it would lead to a positive cash flow.
What does it mean when an option is ‘out of the money’?
An option is ‘out of the money’ when exercising it would not lead to a positive cash flow.
What is the expiration date of an option?
The expiration date is the last date on which the option can be exercised.
True or False: Options can only be traded on stock exchanges.
False
What is the premium of an option?
The premium is the price paid by the buyer to the seller for the option.
What is a European option?
A European option can only be exercised at expiration.
What is an American option?
An American option can be exercised at any time before expiration.
What is implied volatility in the context of options?
Implied volatility is the market’s forecast of a likely movement in the underlying asset’s price.
What is the difference between intrinsic value and extrinsic value in options?
Intrinsic value is the value if the option were exercised today, while extrinsic value is the additional amount paid over intrinsic value, reflecting time and volatility.
What is a covered call strategy?
A covered call strategy involves holding a long position in an asset and selling call options on that same asset.
What is a protective put?
A protective put is an options strategy where an investor buys a put option for an asset they already own to limit potential losses.
Fill in the blank: The ______ of an option is the time left until expiration.
time value
What is the effect of time decay on options?
Time decay refers to the reduction in the value of an option as it approaches its expiration date.
True or False: Options can be used for hedging purposes.
True
What is a long call option?
A long call option is a bullish strategy where the investor buys a call option expecting the underlying asset’s price to rise.
What is a short put option?
A short put option is a bearish strategy where the investor sells a put option expecting the underlying asset’s price to remain above the strike price.
What does ‘assigning’ an option mean?
Assigning an option means that the seller of the option is required to fulfill the obligation of the contract.
What is the role of an options market maker?
An options market maker provides liquidity by being ready to buy and sell options at all times.
