Chapter 11: Options & Other Derivative Securities Flashcards
Premium (option)
The market price of an option.
Exercise Price (a.k.a. Strike Price)
The price at whcih the option holder can exercise the option to buy (call) or sell (put) shares.
In the money…
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
Out of the money…
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
at-the-money option
an option whose strike price is equal to the current market price
American options
an option that may be closed out or excercised at any time prior to or at its expiration date
European options
an option that may be exercised only on its expiration date
Bermuda options
options that can be exercised on a multiple set of predetermined dates (the last being the expiration date)
intrinsic value (option)
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
covered writer
an investor who owns the underlying stock at the time he or she writes a call option on that stock
naked writer
an investor who does not own the underlying stock at the time he or she writes a call option
zero-sum game
situation in which total gains equal total losses among the players
combination position
any position in which more than a single put, single call, or single position in the underlying stock is held
bearish spread
an options strategy using two puts or two calls when a stock price decline is anticipated
Black-Scholes model
the most commonly used call option-pricing formula
hedge ratio
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
binomial option-pricing model
a call option-pricing model that is an alternative to the Black-Scholes model
put-call parity
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
Long-term Equity Anticipation Securities (LEAPS)
options with expiration dates of upt to 3 years, as opposed to maximum expiration dates of 9 months or regulator options
straight-debt value
the value of a convertible bond as a straight-debt (nonconvertible) bond, based on discounted present value of cash flows
