Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

HS328 Investment Planning > Chapter 15: Derivatives Securities: Options Contracts > Flashcards

Chapter 15: Derivatives Securities: Options Contracts Flashcards

1
Q

Call Options

A

gives the holder (buyer) the right, but not the obligation to purchase the underlying security for a specified price (the strike price) within a specified period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

when does a call option allow an investor to profit?

A

when the price of a security increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Put Options

A

gives the holder (buyer) the right but not the obligation to sell the underlying security for a specified price (the strike price) within a specified period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

when does a put option allow an investor to profit?

A

when the price of a security decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

how much risk is there in purchasing a put option?

A

limited risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

the Writer of an option is a person who is ____________ the security

A

selling

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what kind of position does a buyer of an option take?

A

long position

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what kind of position does a writer of an option take?

A

short positions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

intrinsic value

A

is the minimum price at which an option will trade. The intrinsic value can never be lower than 0.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what is the calculation of the intrinsic value for a call?

A

stock price - strike price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what is the calculation for the intrinsic value of a put?

A

exercise price - stock price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

the value of an option calculation

A

intrinsic value
+
time value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

time value calculation

A

is the difference between the premium and the intrinsic value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

At-The-Money

A

an option is “At-The-Money” when the market price for the underlying security equals the strike price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

In-The-Money for a Call Option

A

Stock price is greater than the strick price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

In-The-Money for a Put Option

A

Stock price is less than the strike price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Out-of-The-Money for a Call option

A

stock price is less than the strike price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Out-of-The-Money for a Put option

A

Stock price is greater than the strike price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Intrinsic Value Calculation of a Call Option

A

Market Price - Strike Price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Intrinsic Value Calculation of a Put Option

A

Strike Price
-
Market Price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

which way does the buyer of a call option want the price to go?

A

Up

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

which way does the writer of a call option want the price to go

A

down

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

the buyer of a call option is taking a _________ position.

A

Long

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

the writer of a call option is taking a _________ position.

25
Q

which way does the buyer of a put option want the price to go?

26
Q

which way does the writer of a put option want the price to go?

27
Q

the buyer of a put option is taking a __________ position

28
Q

the writer of a put options is taking a __________ position

29
Q

Protective Put

A

is a form of portfolio insurance.

constructed by combining a long position with a long put option.

30
Q

Covered Call

A

when an investor who sells a call option also purchases shares in the same underlying stock. This is becuase selling a call option results in unlimited loss and the increase in the value of the underlying security can be used to satisfy the obligation of the call option. This strategy should only be undertaken if the expected volatilty of the underlying stock is low and should not be taken if the investor is bullish

31
Q

Collar

A

where an investor limits gains and losses in a long stock position by buying a put and selling a call.

32
Q

Long Straddle

A

when the investor buys a put and buys a call option, with the same strike price and expiration date.

33
Q

When is the long straddle used?

A

when the price of a security is expected to fluctuate greatly, but the investor does not know which way, up or down.

34
Q

two kinds of embedded options

A

Warrants
Convertible Bonds

35
Q

what is a warrant

A

A company selling a bond may attach a warrant to it. It provides the holder of the bond the right but not the obligation to purchase additional shares from the issuing company at a specific price within a specific time. some warrants are detachable.

36
Q

what do warrants do

A

give the holder the right, but not the obligation, to purchase share of the company at a specific price within a specific period.

37
Q

detachable warrants

A

can be separated and traded separately

38
Q

how long are warrents usually for?

A

long term - 2 to 10 years.

39
Q

what do convertible bonds allow for?

A

provide the investor with cash flow and the ability to participate in the potential growth of the underlying security.

40
Q

what are the two components of a convertible bond?

A

the bond
the embedded option

41
Q

Buy a call option:

  1. what position?
  2. what is max gain?
  3. what is min. loss?
A
  1. long position call
    (S - X - P)
  2. Unlimited
  3. Premium
42
Q

Sell a call option:

  1. what position?
  2. what is max gain?
  3. what is min. loss?
A
  1. Short position Call
  2. Premium
  3. Unlimited

Sell a call, you’re short in the game,
Max gain’s the premium, that’s your claim.
Loss is unlimited, so be aware,
Risk is high, handle with care!

43
Q

Buy a put option:

  1. what position?
  2. what is max gain?
  3. what is min. loss?
A
  1. Long position Put
  2. Limited
    (X - P)
  3. Premium

When you buy a put, you’re long in the trade,
The gain’s limited, but the risk is well laid.
Your maximum win’s when the stock falls to the floor,
The loss is the premium you paid, nothing more.

44
Q

Sell a put option:

  1. what position?
  2. what is max gain?
  3. what is min. loss?
A
  1. Short position put
  2. Premium
  3. Limited
    (X - P)
44
Q

Exercising

A

the right to buy or sell the option security at a specified price.

45
Q

moneyness

A

a term to describe the relationship between the strike price of an options and the current trading price.

46
Q

expiration

A

the point in time when the buyer’s rights under the call or put termination.

47
Q

the buyer of an options contract

A

is the holder of the contract

48
Q

the writer of options contracts

A

is the seller of the contract

49
Q

the difference between american and european options contracts.

A

american options can be exercised anytime up until the point of expiration.

european options can be exercised only on the expiration date.

50
Q

offsetting order

A

when an investor wants to close out an option position, it will strategically “offset” that position, by making a trade in the opposite position.

51
Q

offsetting order for the buyer (holder) of an option

A

writing (selling) the same call or put option.

52
Q

offsetting order for the writer of an option

A

buying the same call or put option.

53
Q

how many shares does a standard options contract represent?

A

100 shares

54
Q

what is the Payoff

A

the positive difference between the strike price and the underlying security upon exercise of the option.

55
Q

what is the Payoff calculation for a call option

A

Stock Price - Exercise price

56
Q

what is the Payoff calculation for a put option

A

Exercise Price - Stock Price

57
Q

on a short straddle, the loss is ____________

HS328 Investment Planning (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions