Chapter 11: Options & Other Derivative Securities Flashcards

1
Q

Premium (option)

A

The market price of an option.

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2
Q

Exercise Price (a.k.a. Strike Price)

A

The price at whcih the option holder can exercise the option to buy (call) or sell (put) shares.

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3
Q

In the money…

A

for calls, when the current stock price is higher than the strike price; for puts, when the current stock price is lower than the strike price

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4
Q

Out of the money…

A

for calls, when the current stock price is lower than the strike price; for puts, when the current stock price is higher than the strike price

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5
Q

at-the-money option

A

an option whose strike price is equal to the current market price

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6
Q

American options

A

an option that may be closed out or excercised at any time prior to or at its expiration date

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7
Q

European options

A

an option that may be exercised only on its expiration date

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8
Q

Bermuda options

A

options that can be exercised on a multiple set of predetermined dates (the last being the expiration date)

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9
Q

intrinsic value (option)

A

for a call option, the price of the associated stock less the strike price of the option, or zero if the difference is negative

for a put option, the strike price of a put less the price of the associated stock, or zero if the difference is negative

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10
Q

covered writer

A

an investor who owns the underlying stock at the time he or she writes a call option on that stock

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11
Q

naked writer

A

an investor who does not own the underlying stock at the time he or she writes a call option

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12
Q

zero-sum game

A

situation in which total gains equal total losses among the players

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13
Q

combination position

A

any position in which more than a single put, single call, or single position in the underlying stock is held

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14
Q

bearish spread

A

an options strategy using two puts or two calls when a stock price decline is anticipated

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15
Q

Black-Scholes model

A

the most commonly used call option-pricing formula

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16
Q

hedge ratio

A

in the Black-Scholes model, that ratio of the number of calls written that would exactly offset the stock price movement of a number of shares of the underlying stock held

17
Q

binomial option-pricing model

A

a call option-pricing model that is an alternative to the Black-Scholes model

18
Q

put-call parity

A

a theoretical relationship between the value of a put and a call on the same underlying security wit hthe same strike price and expiration date

19
Q

Long-term Equity Anticipation Securities (LEAPS)

A

options with expiration dates of upt to 3 years, as opposed to maximum expiration dates of 9 months or regulator options

20
Q

straight-debt value

A

the value of a convertible bond as a straight-debt (nonconvertible) bond, based on discounted present value of cash flows