Equity Options Flashcards
Call option
Gives the buyer the right to purchase 100 shares of the stock at a set exercised price for a limited of time
Put Option
Gives the buyer the right to sell 100 shares of stock at a set price for a limited time
Short an option
You are the seller
Long an option
You are the buyer
Exercise Price
is the set price at which the holder/buyer of an option can buy or sell the stock
Premium
Is the price at which an option contract is paid for
Hedging
Is protecting a stock position you already have
Opening Purchases
Buying a call or buying a put
Closing Sales
Sell a call or sell a put
Opening Sales
Sell a call or sell a put, tickets must be marked as “covered or uncovered”
Closing Purchases
Buy a call or Buy a put / eliminating or reducing a short position
Features of call buying
- unlimited upside profit
- Limited loss potential
- leverage and diversification
- Secures a future price
- Hedge a short sale
Reasons for writing / selling a call
- Receive premium income when the market is down
- Improve rate of return
Covered Call Writing
- Premium income with downside protection
- Conservative option
A call writer will be considered covered
- owned the stock or
- obtained and Escrow or Depository Receipt from the bank
- was long a call with an equal or lower exercise price
Options are classified as
Capital Assets
Uncovered call writing
is the most speculative position
-Receives a premium income but has unlimited loss potential
The breakeven calculation on a call
exercise price + premium = Breakeven on a call
The breakeven on a put
exercise price - premium = breakeven on a put
Buy stock (call) if exercised
-Unlimited profit potential
-Limited loss potential
- Max loss premium
Sell stock (call) if exercised
-Limited profit
-Limited loss if covered
Unlimited loss if uncovered
Options clearing Corporations (OCC)
is the issuer, clearing agency and guarantor of all listed option in the US
Bid
is the price an investor would receive if they sell an option (lower)
Ask
is the price an investor would pay if they buy an option (higher)
Exercise cut off time
5:30pm eastern time on the third Friday of the expiration month
In-the-money (call up)
occurs when the market price of the stock is greater than the exercise price
Out-of-the-money
occurs when the market price of the stock is less the exercised price
Long-term equity anticipation securities (LEAPS)
are long term options on stocks and on stock indexes
LEAPS expirations
Equity leaps: 39 months
Index leaps: 39 months
Exercise settlement (LEAPS)
Equity leaps: will settle in stock on the second business day
Index leaps: will settle in cash the next business day
Index Options
are options that mirror a specific index and settle in cash
Options Disclosure Document (ODD) delivery requirements
-must be furnished with a current ODD at or before the time of account approval
-if there are changes, customers must have a revised ODD no later than the time that their next confirmation is sent
Opening a new options accout
a. obtain essential facts
b. provide the customer with a ODD at or before the time the account is approved
c. get the account approved by the securities sales supervisor
d. the option account agreement must be received by the member firm within 15 days from the time the account is approved
e. background and financial information must be sent to the customer for verification within 15 calendar days after account is approved
