Chapter 13 Flashcards
With options, what terms are synonymous with buyer?
Owner, holder, long
A call option gives the owner the right to _____.
buy
With options, what terms are synonymous with seller?
Writer, short
If exercised against, the writer of an equity call option is obligated to _____ the underlying stock.
sell
A put option gives the owner the right to ______.
sell
If exercised against, the writer of an equity put option is obligated to ____ the underlying stock.
buy
True or False: Options are derivatives since their value is based on the changing value of an underlying instrument.
True
Equity options have a contract size of _____ shares.
100
A call option is in-the-money when the market price is ____________ the strike price.
greater than; up
A put option is in-the-money when the market price is ____________ the strike price.
below; down
True or False: A 60 call with the market at 63 is in-the-money.
True
True or False: A 95 call with the market at 95 is in-the-money.
False, it is at-the-money
True or False: A 110 call with the market at 108 is out-of-the-money.
True
True or False: A 60 put with the market at 60 is at-the-money.
True
True or False: A 110 put with the market at 108 is out-of-the-money.
False, it is in-the-money
True or False: A 95 put with the market at 90 is in-the-money.
True
What is intrinsic value?
The amount by which the option is in-the-money
Options will only have intrinsic value if they are ____-the-money.
in-the-money
What is time value?
The option’s premium minus the intrinsic value.
Name three important factors for determining the premium of an equity option.
The stock’s market price versus the strike price, time left until expiration, and volatility of the underlying security
Calls and puts are the two ________ of options.
types
Sandra buys 1 ABC Dec 70 Call at 4. Does Sandra have a right or an obligation?
Right to buy at 70
Sandra buys 1 ABC Dec 70 Call at 4. What is Sandra’s strategy?
She’s a bull, thinks price will go up
Buy 1 ABC Dec 70 Call at 4. When ABC rises to 80, the call is exercised and the stock is immediately sold. Result?
Profit of $6/share, or $600
Sandra buys 1 ABC Dec 70 Call at 4. Later at expiration, if ABC has fallen to 67, would Sandra have a gain or a loss?
loss of the premium, $4/share, $400
Sandra buys 1 ABC Dec 70 Call at 4. Later ABC rises to 80 and Sandra liquidates the call for 11. What is the result?
A $700 gain. She originally paid 4, but received 11 on the sale, netting a $700 gain.
An investor writes 1 DEF May 55 Call at 6. Does she have a right or an obligation?
Obligation to sell at 55
An investor writes 1 DEF May 55 Call at 6. What is the investor’s strategy?
Bearish, thinks stock will go down
An investor writes 1 DEF May 55 Call at 6. Later at expiration, if DEF has fallen to 53, would there be a gain or loss?
Gain of $600 (the premium)
Write 1 DEF May 55 Call at 6. DEF rises to 63 and the investor closes the position at a premium of 9. What’s the result?
A $300 loss since the investor received $600, but paid $900. Closing out means to execute the opposite transaction.
The maximum loss for an option buyer is the ____________.
the premium
The maximum gain for an option seller is the ____________.
premium
True or False: To close (sell) or to exercise for profit, option buyers want contracts to become in-the-money.
True
True or False: Option writers want contracts to expire at- or out-of-the-money.
True
An investor holds 1 XYZ Jan 80 Put at 5. Does she have a right or an obligation?
Right to sell at 80
An investor holds 1 XYZ Jan 80 Put at 5. What is her strategy?
Bearish, thinks stock will drop
An investor holds 1 XYZ Jan 80 Put at 5. What is the result if later XYZ falls to 65, and the put is exercised?
Profit of $1,000. $15/share gain, less $5/share premium, gives $10/share gain. Times 100 shares is $1,000 profit
Bill writes 1 DEF May 55 Call at 6. Later DEF rises to 70 and the call is exercised, what is Bill’s result?
loss of $900, the premium brings the at-the-money price to 61. 9 over that, for $900
An investor holds 1 XYZ Jan 80 Put at 5. Later at expiration, if XYZ has held at 80, would there be a gain or a loss?
loss of $500, the premium
Long 1 XYZ Jan 80 Put at 5. Later XYZ falls to 68, and the put is liquidated at its then premium of 12.50. Result?
A $750 gain. The investor originally paid $500, but then received $1,250, netting a $750 gain.
Jim is short 1 MNO Aug 40 Put at 4.50. Does Jim have a right or an obligation?
Obligation to buy at 40
Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim’s strategy?
Bullish, thinks stock will go up
Short 1 MNO Aug 40 Put at 4.50. MNO falls to 30, the put is exercised and the stock is immediately sold. Result?
loss of $550. The breakeven is 35.50, but the stock fell 5.50 lower than 35.50.
Jim is short 1 MNO Aug 40 Put at 4.50. If MNO rises to 44 at expiration, would Jim have a gain or a loss?
gain of $450 (the premium)
Jim shorts 1 MNO Aug 40 Put at 4.50. XYZ later falls to 32 and Jim liquidates at the intrinsic value. Result?
loss of $350. Jim originally received $450, but then closed out by paying $800, netting a $350 loss.
How would an option order ticket be marked for an investor whose initial transaction was the purchase of a call?
Opening Purchase
How would an option order ticket be marked for an investor whose initial transaction was the sale of a put?
Opening Sale
To offset an option purchase, an investor would execute a ________________.
closing sale
To offset an option sale, an investor would execute a ___________________.
closing purchase
True or False: Both the buyer and seller of an option have the right to exercise.
False, only buyers can execute
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much intrinsic value does the option have?
$1.00 or 1 point
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much time value does the option have?
$2.00 or 2 points
Consider the following: ABC Sep 45 Put at 6 If ABC is trading at 41, how much intrinsic value does the option have?
$4.00 or 4 points
Consider the following: ABC Sep 45 Put at 5 If ABC is trading at 41, how much time value does the option have?
$1.00 or 1 point
Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much intrinsic value does the option have?
0, it is at-the-money
Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much time value does the option have?
$2.00 or 2 points
Consider the following: TNT Jun 80 call at 3 If TNT is trading at 78, how much intrinsic value does the option have?
0, it is out-of-the-money
Consider the following: TNT Jun 80 Call at 3 If TNT is trading at 78, how much time value does the option have?
$3.00 or 3 points
True or False: Option sellers want contracts to expire at-the-money or out-of-the-money.
True
What is an uncovered call position?
The sale of a call (obligation to sell) without owning the stock
What is the breakeven point? Buy 1 XYZ Jan 55 Call at 5.10
60.10
What is the breakeven point? Sell 1 RFQ Feb 85 Call at 2.70
87.7
What is the breakeven point? Long 1 MNO March 40 Put at 1.00
39
What is the breakeven point? Short 1 XYZ Apr 70 Put at 2.80
67.20
What is the maximum profit? Buy 1 RFQ May 35 Call at 2.50
it is unlimited
What is the maximum gain? Write 1 MNO June 60 Call at 3.60
$360.00, the premium
What is the maximum profit? Long 1 XYZ July 115 Put at 4.20
$11,080. If goes down to $0 get $115 minus $4.20/share
What is the maximum gain? Sell 1 RFQ Aug 50 Put at 4.10
$410, the premium
What is the maximum risk? Buy 1 MNO Sep 60 Call at 6.70
$670
What is the maximum loss? Short 1 XYZ Oct 110 Call at 4.80
unlimited
What is the maximum risk? Long 1 RFQ Nov 70 Put at 6.90
$690
What is the maximum loss? Sell 1 MNO Dec 65 Put at 5.30
$5,970. $65/share minus $5.30 equals $59.70/share
Define a series of options.
All options with the same underlying interest, expiration month, strike price and type (e.g. ABC May 60 Call)
Define a class of options.
All options with the same underlying interest and the same type (e.g. STC calls or STC puts)
