Chapter 11 Crunch time Flashcards
commodity options
provides a buyer the right to buy a futures contract at a preset price
calls
obligates a seller to sell a futures contract at a preset price
calls
provide a buyer with the right to sell a futures contract at a preset price
puts
obligates a seller to buy a futures contract at a preset price
puts
are in-the-money when the market is up above the strike price
calls
are in-the-money when the market is down below the strike price
puts
premium =
intrinsic value + time value
An options intrinsic value is equivalent to…
its in-the-money amount
When does an option have zero intrinsic value?
when it is at-the-money or out-the-money
number based on the time left until expiration and the volatility of the underlying commodity
time value
this number is set in the marketplace and is negotiated
premium
Long straddle:
buy both a call and a put; investors would be seeking volatility
Short straddle:
sell both a call and a put; investors seeking stability
Bullish or Bearish?
debit call spread
bullish
Bullish or Bearish?
credit call spread
bearish
Bullish or Bearish?
debit put spread
bearish
Bullish or Bearish?
credit put spread
bullish
consists of two spreads, both call or put on the same commodity and the same expiration month where one is bullish and one is bearish
butterfly spread
created by buying an option with a lower strike price, selling two options at the same strike price in the middle, and buying an option with a high strike price
butterfly spread
For a butterfly spread, how is the maximum gain realized on the underlying commodity?
if the underlying commodity is at the strike price. a butterfly spread is profitable if the price remains stable (it has a neutral position)
consists of two spreads, both call or put on the same commodity and the same expiration but with different strike prices
condor spread
is a debit spread and profitable if the price remains stable (i.e. low volatility)
long condor spread
is a credit spread and profitable if there’s high price volatility
short condor spread
consists of selling two spreads, one is a call and one is a put on the same commodity and the same expiration month but with four different strike prices
iron condor spread
What are the details of the iron condor spread?
- credit spread
- neutral strategy
- max profit is realized if all options expire
For an iron condor spread, the maximum loss is limited but will be realized if…
the price of the underlying commodity moves significantly in one direction or the other (i.e., if there’s volatility).
synthetic long call =
long put + long futures
synthetic long put =
long call + short futures
synthetic long futures =
long call + short put
synthetic short futures =
long put + short call
conversion =
long futures + long put + short call
reversal =
short futures + long call + short put
these types of options may only be exercised on the business day prior to expiration
European-style option contracts
these types of options may be exercised at any time during their life
American-style option contracts
An order must be time stamped within…
one minute of receipt by the FCM.
