Equity Options Flashcards
Legally binding contracts between buyers and sellers. The buyer of this contract is the holder, who has the right to buy or sell a round lot of the underlying security at a specified price, known as the strike or exercise price. The holder pays a premium for the right, but NOT THE OBLIGATION, to exercise the the contract within a specified time period.
Options
Entity that standardizes options contracts so they can trade on exchanges. This entity sets strike prices and expiration dates and is the issuer and clearing agent for listed options. It is owned by the exchanges that trade options.
Options Clearing Corp (OCC)
What are the two types of options?
Puts and Calls
Options that consists of options of the same type on the same underlying security
Class
Options of the same class that also hve the same expiration date
Series
What are the two exercise styles of options
American and European
Person who has a long position in options, who pays the premium and has the right to exercise the option
Holder
Person who has a short position in options, who sells a put or call that they don’t own - in other words, they are short the put or call. This person collects the premium and has the obligation to buy or sell the underlying security if it is exercised.
Option Writer
Price of an option
Premium
Price at which an option can be exercised
Strike Price (Exercise Price)
Time when option contract ceases to exist or becomes worthless, which is the Saturday following the third Friday of the month at 11:59 ET. The friday before this time is the last trading day.
Expiration
Negotiated options that trade in the OTC market. They are not standardized or listed on an exchange. OTC options are often used by portfolio managers to help them hedge or protect their portfolios, beacuse these can be custom-designed to meet the portfolio’s needs at a specific time.
OTC Options
Contract that gives the option holder the right to purchase 100 shares of the underlying security, at the strike price, until expiration. The holder pays the premium and does not receive dividends. A writer of this contract has the obligation to sell 100 shares of the underlying security at the strike price, until expiration. The writer receives the premium.
Call
Contract that gives the holder the right to sell 100 shares of the underlying security, at the strike price, until expiration. The holder pays the premium for this contract. A writer of this contract sells this short and has the obligation to buy 100 shares of the underlying security at the strike price, until expiration. Writer receives the premium.
Put
Exercise style that allows options to only be exercised during a specific time period, usually the last trading day before expiration.
European Style
Exercise style that allows options to be exercised at any time up to expiration
American Style
When holder wants to exercise, they notify broker dealer, who notifies OCC. The OCC picks a broker/dealer at random and broker/dealers can pick their customers at random, on a FIFO basis, or any other way that is fair and reasonable. What is this called?
Assignment
Stock or index options with expiration dates out to 39 months. Only long positins of this can result in long-term capital gain or losses. These occur when these options are held for a period greater than 12 months.
Long-Term Equity Anticipation Participation Securities (LEAPS)
Intrinsic Value + Time Value = ?
Premium
Value determined by how much time there is until the expiration date. The more of this means more value and less means less value. The value erodes as it nears the expiration date.
Time Value
There is intrinsic value when the price of the underlying security is higher than the strike price of the option. What option is this?
Call
This option has intrinsic value when the price of the underlying security is lower than the strike price. What is this option?
Put
When an option has intrinsic value, what is the option called?
In The Money
When the market price of the underlying security is the same as the option strike price, what is this called?
At The Money