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Investment Planning > Derivatives (Lesson 8) > Flashcards

Derivatives (Lesson 8) Flashcards

1
Q

How many shares does an option contract control

A
  • 100 shares
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2
Q

What is call option

A
  • is the right to buy a specified number of shares at a specified price within a specified period of time (American option) or at a specified future date (European option)
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3
Q

What is a put option

A
  • is the right to sell a specified number of shares at a specified price within a specified period of time (American option) or at a specified future date (European option)
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4
Q

What are the three reasons that people invest in options

A
  • Hedging
  • Speculation
  • Income
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5
Q

What does a buyer of a call option believe

A
  • the price of underlying stock will rise
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6
Q

What does a buyer of a put option believe

A
  • the price of underlying stock will fall
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7
Q

What does a seller of a call option believe

A
  • the price of underlying stock will fall or stay the same
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8
Q

What does a seller of a put option believe

A
  • the price of the underlying stock will rise or stay the same
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9
Q

If the investor wants to maximize the gain if the stock price appreciates the investor will

A
  • buy a call
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10
Q

If the investor wants to maximize the gain if the stock price falls the investor will

A
  • buy a put
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11
Q

What does the option premium consist of

A
  • Intrinsic value
  • Time premium
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12
Q

What is the intrinsic value of an option

A
  • Call Option: Stock Price - Strike price
  • Put Option: Strike Price - Stock Price
  • Cannot be less than $0
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13
Q

What is the time value of an option

A
  • TV = Premium - Intrinsic Value
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14
Q

How do you calculate the gain or loss of an option

A
  • consider two components:
  • Intrinsic value and premium paid
  • STOPS
  • St: Stock Gain or loss - if you own the underlying stock
  • O: Options gain or loss
  • P: Premium paid or received
  • S: Shares controlled or owned
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15
Q

(Options Trading Strategies)

Covered Call

A
  • selling call options on stock that is currently owned by the investor
  • appropriate for a stock that has been in a trading range and the investor wants to generate some income and continue to own the stock
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16
Q

(Options Trading Strategies)

Married Put

A
  • involves buying a put option no a stock or index that is currently owned by the investor
  • called portfolio insurance if the investor owns a diversified portfolio of common stocks
17
Q

(Options Trading Strategies)

Long Straddle

A
  • investor buys a put and a call option on the same stock
  • investor expects volatility but is unsure as to the direction
18
Q

(Options Trading Strategies)

Short Straddle

A
  • investor sells a put and a call option
  • investor does not expect volatility and is hoping to keep the premiums with little to no volatility in the stock price
19
Q

(Options Trading Strategies)

Collar or Zero Cost Collar

A
  • investor owns the underlying stock but wants to protect the downside risk without paying the entire cost of the put option
  • Investor sells a call option at a strike price that is slightly higher than the current stock price (Creates the a premium received)
  • Investor then buys a put option that is below the current stock price
  • Premium dollars received by selling the call are used to buy the put option
20
Q

When an investor wants to protect profits or lock in gains the correct option strategy is

A
  • buying a put
21
Q

What does the Black/Scholes model determine

A
  • the value of a CALL option
22
Q

What are the variables for the Black/Scholes model

A
  • Current price of the underlying asset
  • Time until expiration
  • Risk free rate of return
  • Volatility of the underlying asset
23
Q

All the variables for the Black/Scholes model have a ____ relationship on the ______ of the option except the _____ _____

A
  • Direct relationship
  • Price of the option
  • Strike Price
24
Q

As the strike price increases the option _____ in value

A
  • Decreases
25
Q

What is the Put/Call parity option pricing model

A
  • Attempts to value a PUT option based on the value of a corresponding call option
26
Q

What is the binomial pricing model for pricing options

A
  • attempts to value an option based on the assumption that a stock can only move in one of two directions
27
Q

Tax consequences of a call or put option expiring

A
  • if contract lapses or expires then the premium paid is a short term loss or premium received is a short term gain
28
Q

Tax consequences of a call option being exercised

A
  • premium is added to the stock price to increase the basis
  • if underlying stock is held for more than 12 months it will be considered a LT capital gain, if less than or equal to 12 months it is a ST capital gain
29
Q

What are Long Term Equity Anticipation Securities (LEAPS)

A
  • options that have longer expiration periods than traditional options
  • Premium is higher because of the extended time period
30
Q

What are warrants

A
  • essentially long term call options issued by the corporation
  • Call options written by investors
31
Q

Are warrant terms standardized

A
  • Not standardized
  • call options are standardized
32
Q

Which way of purchasing of selling an option has the greatest loss potential

A
  • Selling a naked call
33
Q

What are the two types of future contracts

A
  • Commodity futures
  • Financial futures
34
Q

What are the differences between futures and options contracts

A
  • option contracts give the holder the right to do something and futures contracts obligate the holder to make or take delivery of the underlying asset
  • Futures contracts do not state the per unit of the underlying asset which is determined by supply and demand
35
Q

Who are the two primary players in the futures market

A
  • Hedgers and speculators
36
Q

What kind of accounting are futures contracts on and what does it mean

A
  • Marked to Market
  • the gain or loss is credited to your account on a daily basis
37
Q

Types of hedging using futures:

Long the commodity, Short the contract

A
  • Have the commodity and want to lock in profits
38
Q

Types of hedging using futures:

Short the commodity, Longthe contract

A
  • Don’t have the commodity but have to purchase it to make their own product

Investment Planning (8 decks)

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