Chap 1 Flashcards
Put Option
The right to SELL an underlying security at a certain price for a certain amount of time
Series
All contracts of the same class having the same expiration date and striking price
Parity
Relationship that occurs when the underlying security is trading at its intrinsic value. EX: One $50 Microsoft call option, for example, means that the owner can buy 100 shares of Microsoft common stock at $50 per share before the option expires. If the market price of Microsoft is $60 per share, the intrinsic value of the option is ($60 - $50), or $10 per share. If the price of the stock option is also $10, the option trade is at parity.
Stop Limit Order
An order that becomes a limit order when the specified price is reached. A stop-limit order requires the setting of two price points.
Stop: The start of the specified target price for the trade.
Limit: The outside of the price target for the trade.
*a time frame may also be set
EX: For example, assume that Apple Inc. (AAPL) is trading at $170.00 and an investor wants to buy the stock once it begins to show some serious upward momentum. The investor has put in a stop-limit order to buy with the stop price at $180.00 and the limit price at $185.00. If the price of AAPL moves above the $180.00 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $185.00, which is the limit price, the trade will be filled. If the stock gaps above $185.00, the order will not be filled.
Buy stop-limit orders are placed above the market price at the time of the order, while sell stop-limit orders are placed below the market price.
Exercise Price
The price at which the stock underlying an option may be bought or sold
Time Value Premium
The amount by which an option premium exceeds the intrinsic value. Theta is=time value decay & know as extrinsic value
Influenced by 2 factors
- Time until expiration the more time the more value
- How close the strike price is to the underlying security
Intrinsic Value vs. Time Value
In-the-money Out-of-the money At-the-money
Put/Call Time-value decreases as the option gets deeper in the money; intrinsic value increases. Time-value decreases as option gets deeper out of the money; intrinsic value is zero. Time-value is at a maximum when an option is at the money; intrinsic value is zero.
The rate of time decay also decreases and does so significant more a 6 months to expiration
Intrinsic Value
The amount by which the stock price exceeds the striking price
Call Option
The right to buy an underlying security at a certain price for a certain amount of time
Good Until Cancelled Order
An order that remains valid for 6 months if not renewed by the customer
Assignment
The carrying out of the obligation of the writer to fulfill the terms of an option contract
LEAPS Option
An option that will expire in one or more years
A transaction that reduces an investor’s position in an options is called a
Closing Position
A call option is BLANK if the stock is selling below the striking price of the option?
Out of the money
The terms of a listed option are affected by?
splits and stock dividends
The four major determinants of an option’s price are
price of the underlying stock, striking price, time remaining and volatility
