Chapter 5: Options Contracts Flashcards
______ are legally binding contracts between buyers and sellers.
Options
The option holder has the ______ (______ option) or the ______ (______option) a(n) ______ (100 shares) of the underlying security at a specified price, known as the “______” or “______” price.
- Right to Buy (Call Option)
- Right to Sell (Put Option)
- Round Lot
- Strike
- Exercise
The buyer of an option is called the “______”.
Holder
______ are valid for a specified period of time; consequently, the ______ has a definite start and expiration date after which the ______ itself is worthless.
Option(s)
An option buyer (holder) pays a(n) ______ (option price) for the ______, but not the ______, to exercise the option within a specified time period.
- Premium
- Right
- Obligation
If the option holder chooses to exercise the option, then the ______ (seller) of the option contract is ______ to buy or sell the security at the strike price.
- Writer
2. Obligated
The ______ standardizes options contracts so they can trade on exchanges. It sets strike prices, expiration dates, contract sizes, and is the issuer and clearing agent for listed options. It is owned by the ______ that trade options.
- Options Clearing Corporation (OCC)
2. Exchanges
There are two types of options contracts: ______ and ______.
A(n) ______ of options consists of options of the same type on the same underlying security.
A(n) ______ of options consists of options of the same class that also have the same expiration date.
The exercise style of the option: ______ or ______.
The ______ is the price of an option.
The ______ or ______ price is the price at which an option can be exercised.
- Puts and Calls
- Class
- Series
- American or European
- Premium
- Strike or Exercise
The ______ has a long position in option, pays the premium (price), and has the right to exercise the option.
Option Holder
The ______ has a short position in the options, sells a put or call that they don’t own, collects the premium (price), and has the obligation to buy or sell the underlying security if it is exercised.
Option Writer
The ______ is the day on which the option contract ceases to exist or becomes worthless. At ______, options are either exercised or expire.
- Expiration Date
2. Expiration
Equity options expire on the ______ at ______. This is the last trading day, unless it is a holiday, in which case expiration and the last trading day will fall on the ______ of the expiration month.
- Third Friday of the Month
- 11:59 P.M. Eastern Time
- Third Thursday
______ are negotiated options that trade in the OTC market. They are not standardized or listed on an exchange. ______ are often used by portfolio managers to help them hedge or protect their portfolios, because these options can be custom-designed to meet the portfolio’s needs at a specific time.
- Over-The-Counter (OTC) Options
2. OTC Options
A(n) ______ is a contract that gives the call holder the right to purchase 100 shares of the underlying security, at the strike price (also called the exercise price), until expiration.
Call Option
A call holder does NOT receive ______ on the underlying security or have ______.
- Dividends
2. Voting Rights
The call holder has the ______, but is not ______, to exercise the option within a specified period of time. A call holder pays the ______ for the call.
- Right
- Obligated
- Premium
A call writer sells the call ______. He has the ______ to sell 100 shares of the underlying security at the ______ price, until expiration. The call writer receives the ______.
- Short
- Obligation
- Strike
- Premium
Call Holder:
- ______ Calls
- ______ Premium
- ______ to BUY or SELL
Call Writer:
- ______ Calls
- ______ Premium
- ______ to BUY or SELL
- Long
- Pays
- Right to BUY
- Short
- Receives
- Obligation to SELL
If the call writer does not own the underlying security that he is obligated to sell at expiration for a predetermined price, he could have a(n) ______ if the price of the security increases substantially. This is because the investor would be required to buy the security at the higher current market price and sell it to the call holder at the lower strike price.
Unlimited Potential Loss
A ______ has the right to sell 100 shares of the underlying security at the strike price (also called the exercise price), until expiration. The ______ pays the premium (price) for the put.
Put Holder
A ______ sells the put short. He has the obligation to buy 100 shares of the underlying security at the strike price, until expiration. The ______ receives the premium.
Put Writer
Put Holder:
- ______ Puts
- ______ Premium
- ______ to BUY or SELL
Put Writer:
- ______ Puts
- ______ Premium
- ______ to BUY or SELL
- Long
- Pays
- Right to SELL
- Short
- Receives
- Obligation to BUY
The main components of an option contract are the underlying ______, the ______ date, the ______ of option, and the ______ price.
- Security
- Expiration
- Type
- Strike
ABC June 30 call at $1.50
ABC = \_\_\_\_\_\_ June = \_\_\_\_\_\_ 30 = \_\_\_\_\_\_ Call = \_\_\_\_\_\_ $1.50 = \_\_\_\_\_\_
ABC = Underlying Security June = Expiration Month 30 = Strike Price Call = Type of Option $1.50 = Premium