Derivatives Flashcards

Question

Assignment

Answer 1

SHORT OPTIONS GET ASSIGNED > Assignment of a call is the option writer fulfilling their obligation to sell the shares at the strike price. (Typically 100 shares). A short option can be assigned at any time! > Assignment of a put is the option writer fulfilling their obligation to buy the shares at the strike price (Typically 100 shares). > As an option seller, you do not choose if/when an assignment will occur. The option buyer controls this, assignment happens when they choose to exercise their option. > IMPORTANT - A Short (sold) option can be assigned at any time!! Even if it has no intrinsic value.

Answer 2

Using the above AAPL example, here is what the Exercise of a call would look like: If you exercised your long AAPL call, you would purchase 100 shares of AAPL at 120. 100 x $120 = $12000. **NOTE** Many people use options for leverage, if you had 10 of those contracts and exercised them, it would be 10 X 100 X 120 = $120,000!

Answer 3

Using the same example, here is what an Assignment would like: If you were assigned on the one call, you would need to deliver 100 shares of AAPL, and you would receive $120 per share, 100 x $120 = $12,000. But what if you didn't already own the shares? You would have to go into the market and buy them at whatever price they were trading at, which would likely be higher than $120.00 per share. Another Example: What if AAPL was now trading at $130.00? It would now be 100 X 130 = $13,000

Answer 4

Here is what an Exercise of put would look like: If you exercised your Long AAPL put, you would sell 100 AAPL shares at 120. You would receive the proceeds of 100 X $120= $12000.

Answer 5

Here is what an Assignment of put would look like: If you were assigned on the one put, you would need to buy 100 shares of AAPL and you would pay $120 per share 100 x $120 = $12000. Remember leverage, if you sold 10 of the puts it would be 10 x 100 x $120 = $120,000 you would be paying for 1000shares of AAPL

Answer 6

Index options are "European" style, meaning they can only be exercised at expiration, as opposed to "American" style which can be exercised at any time. Additionally, index options are based on an index, which cannot be delivered, therefore, they settled in cash.

Answer 7

You are Long (own) 1 SPX call expiring on 12/19 with a strike price of 2080. If your one SPX call were exercised because SPX closed ate 2081 on expiration, you would receive $100 cash into your account. Your option has $1 intrinsic value X the multiplier for SPX which is $100 = $100

Answer 8

* The difference between the strike price of the option and the current market price of the underlying asset * The payoff the buyer would receive if they exercise the option right away * The profit that would realized if the option were exercised immediately * The concrete, real-world worth of an option at any given point

Answer 9

1. Intrinsic Value - the measure of the true value; it is the difference between the stock price and the strike price 2. Time Value - is a measure of "uncertainty" - the potential that the option could hold more intrinsic value in the future All else equal, the time value erodes as expiration nears - the uncertainty about the stock's price movements between now and the expiration gets lower and lower

Answer 10

► The Time Value of calls and puts at each strike price is nearly equivalent ► A covered call and a cash secured put of the same strike price have almost identical risk (max loss, breakeven) and reward (max gain) profiles ► The only difference to the trader is the probability that the trade will result in the acquisition or sale of the underlying security ► At the money contracts have the most time value, but is not always the best choice

Answer 11

~ In-the-money options are those options that have intrinsic value ~ Calls with strikes below where the underlying is currently trading ~ Puts with strikes above where the underlying is currently trading

Answer 12

~ At the money options are options that have a strike price closest to where the underlying is currently trading

Answer 13

~ Out of the Money options are those which have no intrinsic value ~ Calls with strikes above where the underlying is currently trading ~ Puts with strikes below where the underlying is currently trading

Answer 14

► Money-ness of the option being sold (Strike Selection) ► Out-of-the-money options offer lower premiums ► At-the-money option contracts have the most time value ► In-the-money options offer higher premiums ► Time to Expirations (Expiration Selection) ► Nearer term expirations offer the potential for the highest annualized return but off a lower upfront premium ► Longer-dated expirations decay at a slower rate but offer the advantage of more upfront premium (income certainty) ► Expected Movement from the Underlying (Implied Volatility) ► Higher implied volatility (expected price movement) results in higher premiums ► When selling options, if that expected volatility becomes realized volatility, it can result in substantial losses

Answer 15

A swap in which the principal increases in each time period

Answer 16

A Contractual agreement between two parties with standard terms. All listed options contracts are governed by the same rules.

Answer 17

► By buying an options, you are buying a specific set of rights ► By selling an option, you are acquiring a specific set of obligations

Answer 18

√ Serves as a central clearinghouse and regulator for listed options traded in the United States under the auspices of the SEC and CFTC. √ The OCC clears exchange-traded transactions in options contracts and interest rate composites √ Value-added solutions provided by the OCC include research services, investor education, customer support, and marketing outreach

Answer 19

Where the time value of the option falls on a daily basis until the expiration date - stocks don't possess it

Answer 20

The price of a call option rises when its underlying stock goes up. But if the move in the stock is too late, because it happens too close to the expiration date, the call can expire worthless. You can literally buy yourself more time, though - some options have expiration periods as late as 9 months to 2½ yrs.

Answer 21

» Buy a specific quantity of the underlying stock (exercise) » Buy the stock by a certain date (expiration) » Buy the specific quantity of stock at a specified price (known as the strike price) In other words, the price of the call option rises when the stock price goes up because the price of the rights you bought through the option is fixed while stock itself is increasing in value.

Answer 22

This means that you review how a set of strategies has worked in the past

Answer 23

** Hedging in option trading involves taking positions that offset risk, effectively reducing overall risk exposure. ** Hedging strategies are used to reduce uncertainty and limit losses without significantly reducing potential retuns. ** A properly design ed