Defining Options Flashcards
Learn about the options trading instrument, option terms and option chains.
Options are purchased in:
Contracts
1 contract equals ___ shares of a stock
100
The options buyer has the _____ to buy or sell
right
The options seller (writer) has an _________ to buy or sell
obligation
The Call option: Provides the options buyer the _____ __ ___ an equity at a fixed priced within a set time frame.
right to buy
The Call option: _________ the options writer (seller) __ ____ an equity at a fixed price within a set time frame.
Obligates to sell
The Put option: Provides the options buyer the _____ __ ____ an equity at a fixed price within a set time frame.
right to sell
The Put option: ________ the Put options writer (seller) __ ___ an equity at a fixed price within a set time frame.
Obligates to buy
Options allow you to benefit from equity movements without ______ _________.
equity ownership
Options allow you to ________ trading capital.
leverage
Options can generate a greater ___
ROI
Options are ____ risky since less capital is used to benefit from ______ _________.
less equity movements
(When you compare the capital required to own 1,000 shares of an equity versus buying 10 option contracts that represent the same 1,000 shares).
By combining option trading instruments, we can create a _______ _____ that significantly reduces risk and improves results.
spread trade
A fixed price at which the option can be exercised. It is also known as the exercise price.
Strike price
The date on which the option expires. For stock options this is always a Saturday following the third Friday of the expiration month.
Expiration date
The value at which we sell an option — wholesale.
Bid
The value at which we buy an option — retail.
Ask
A Call Option is “ITM” if the current market value of the equity is above the strike price of the option.
“In the Money” - (Financial advantage - intrinsic value)
A ___ _______ is “ITM” if the current market value of the equity is below the strike price of the option.
Put Option - For example: If the current market price of xyz stock is $50, an xyz 45 call would be “in the money” by $5.
When the current market value of the stock is the same as the strike price of the option.
“At the Money”
When the strike price of a call is above the current market value of the equity, or if the strike price of a put is below the current market value of the equity
“Out of the Money” - For example: The current market price of xyz stock is at $50, a call with a strike price of $55 would be “out of the money” by $5 and a put would be “out of the money” by $5 with a strike price of $45.
The number of contracts that have exchanged hands for the day. This value is generated by option activity at each of the member exchanges (CBOE, etc).
Volume — (opened or closed - buy or sell unknown)
The total number or outstanding contracts for a particular equity, month and strike price. This value is maintained by the Options Clearing Corporation (0CC) and does NOT change during the trading day. It is recalculated before Market Open and reflects the NET changes from the day before.
Open Interest — (for long term expectation (LEAPs)
The actual value. It reflects the amount, if any, by which an option is “in the money”.
Intrinsic Value — For example: xyz stock is currently at $45 dollars a share, an xyz 40 call would have an intrinsic value of $5 per share. If the market price of the stock were to decline to $40 or lower, the call would no longer have any intrinsic value. (Stock Price - Strike Price) No time element