chapter 6 Flashcards
call option
an options contract that gives the purchaser the right to buy stock at fixed price an obligates the seller to sell the stock at a fixed price if the contract is exercised
put option
an options contract that gives the purchaser the right to sell stock at a fixed price and obligates the seller to buy the stock at a fixed price if the contract is exercised
premium
the cost of an options contract, which is paid by the buyer, who is purchasing the right to do something, and received by the seller, who is taking on the obligation to do something
time value
the portion of a option’s premium that reflects the time remaining until expiration
in the money
the situation in which an option has exercisable value, which for call options occurs when the market value is above the strike price and for put options when the market value is below the strike price
out of the money
the situation in which an option has no exercisable value, which occurs for call options when the market value is below the strike price and for put options when the market value is above the strike price
Uncovered call ( naked call)
the riskiest options position, where an investors sells a call option without owning the underlying stock and therefore, if the contract is exercised, must purchase
covered call
a conservative options position where an investors sells a call option while owning the underlying stock, generating income for the investors at the cost of potentially losing the upside appreciation of his shares if the option is exercised and he is forced to sell
hedge
when investors takes a position with an opposite outlook and attitude to protect an existing investment
closing transaction
when an investors liquidates her option position and exits the market by the either repurchasing an option she originally sold or selling an options she originally purchased
