Chapter 13 Flashcards
Equity Options-Fundamentals and Basic Strategies
Option Series
All of the options of the same class, with the same expiration date, and the same exercise price
Covered Call Writer
If the seller of a call owns the underlying stock
Uncovered Call Writer
- If writer does not own the shares
- exposed, uncovered, naked
- may only be executed in a margin account
How many shares of stock are in each option contract that is called “one round lot”
100
Intrinsic Value
amount by which an option is in-the-money
- will only exist if the option is in the money
- no such thing as a negative intrinsic value
- if option is at or out of the money, intrinsic value is zero
Time Value
portion of an options premium that exceeds its intrinsic value
Option Premium Formula
Intrinsic Value plus Time Value
Calls: In-, At-, and Out- of the money
In: if the stock market’s price is above the strike price
At: if the stock market’s price is the same the strike price
Out: if the stock market’s price is below the strike price
Puts: In-, At-, and Out- of the money
In: if the stock market’s price is below the strike price
At: if the stock market’s price is the same the strike price
Out: if the stock market’s price is above the strike price
Buyers want options to be
in the money
Sellers want options to be
out of the money or at the money
Time Value
Premium minus Intrinsic Value
What can affect time value on an option?
Time left until expiration
Market volatility
Interest Rates
Supply & Demand
LEAPS
LT equity options have lives up to 39 months
American Style Exercise
May be exercised at any time up until the day of expiration
-all listed equities options use American style exercise
