Equity Options--Fundamentals and Basic Strategies Flashcards
Sandra buys 1 ABC Dec 70 Call at 4. Later at expiration, if ABC has fallen to 67, would Sandra have a gain or a loss?
A $400 loss of the premium.
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much intrinsic value does the option have?
$1.00 or 1 point
True or False: A 60 put with the market at 60 is at-the-money.
True
A put option gives the owner the right to ______.
A put option gives the owner the right to sell.
Long 1 XYZ Jan 80 Put at 5. Later XYZ falls to 68, and the put is liquidated at its then premium of 12.50. Result?
A $750 gain. The investor originally paid $500, but then received $1,250, netting a $750 gain.
Sandra buys 1 ABC Dec 70 Call at 4. Does Sandra have a right or an obligation?
Right to buy at 70
Equity options have a contract size of _____ shares.
Equity options have a contract size of 100 shares.
A call option gives the owner the right to _____.
A call option gives the owner the right to buy.
What is the maximum profit? Long 1 XYZ July 40 Put at 5.10
The maximum profit is the strike price - premium = 3490.00
What is an uncovered call position?
The sale of a call (obligation to sell) without owning the stock
To offset an option purchase, an investor would execute a ________________.
To offset a purchase, an investor would execute a closing sale.
A call option is in-the-money when the market price is ____________ the strike price.
A call option is in-the-money when the market price is UP above the strike price.
Buy 1 ABC Dec 70 Call at 4. When ABC rises to 80, the call is exercised and the stock is immediately sold. Result?
A $600 profit since the investor is bullish and the stock rose 6 points above the breakeven point of 74.
Options will only have intrinsic value if they are ____-the-money.
Options will only have intrinsic value if they are in-the-money.
Name three important factors for determining the premium of an equity option.
- The stock’s market price versus the strike price,
- time left until expiration, and
- volatility of the underlying security
An investor holds 1 XYZ January 80 Put at 5. What is her breakeven point?
80 - 5 = 75 (strike price minus premium or PUT DOWN)
True or False: Both the buyer and seller of an option have the right to exercise.
False. Only buyers can exercise the contract.
How would an option order ticket be marked for an investor whose initial transaction was the purchase of a call?
Opening purchase
Jim shorts 1 MNO Aug 40 Put at 4.50. MNO later falls to 32 and Jim liquidates at the intrinsic value. Result?
A loss of $350. Jim originally received $450, but then closed out by paying $800, netting a $350 loss.
Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s strategy?
Bullish (to find the strategy for call buyers, use the phrase CALL UP)
What is the maximum loss? Short 1 XYZ Oct 95 Call at 3.20
The maximum loss is unlimited
The maximum loss for an option buyer is the ____________.
The maximum loss for an option buyer is the premium.
True or False: A 110 call with the market at 108 is out-of-the-money.
True
What is the breakeven point? Sell 1 RFQ Feb 25 Call at 1.70
The breakeven point is strike price + premium = 26.70
True or False: Option sellers want contracts to expire at-the-money or out-of-the-money.
True. If the option expires worthless, the seller would keep the premium.
To offset an option sale, an investor would execute a ___________________.
To offset a sale, an investor would execute a closing purchase.
How would an option order ticket be marked for an investor whose initial transaction was the sale of a put?
Opening sale
True or False: A 95 put with the market at 90 is in-the-money.
True
True or False: A 95 call with the market at 95 is in-the-money.
False, it is at-the-money.
Write 1 DEF May 55 Call at 6. DEF rises to 63 and the investor closes the position at a premium of 9. What’s the result?
A $300 loss since the investor received $600, but paid $900. Closing out means to execute the opposite transaction.
Sandra buys 1 ABC Dec 70 Call at 4. Later ABC rises to 80 and Sandra liquidates the call for 11. What is the result?
A $700 gain. She originally paid 4, but received 11 on the sale, netting a $700 gain.
Jim is short 1 MNO Aug 40 Put at 4.50. If MNO rises to 44 at expiration, would Jim have a gain or a loss?
A gain of the $450 premium
Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s breakeven point?
70 + 4 = 74 (strike price + premium or CALL UP)
What is the maximum risk? Buy 1 MNO Sep 120 Call at 3.80
The maximum risk is the premium = 380.00
True or False: A 60 call with the market at 63 is in-the-money.
True
Jim is short 1 MNO August 40 Put at 4.50. What is Jim’s breakeven point?
40 - 4.50 = 35.50 (strike price minus the premium or PUT DOWN)
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much time value does the option have?
$2.00 or 2 points
What is the maximum gain? Sell 1 RFQ Aug 70 Put at 6.50
The maximum gain is the premium = 650.00
An investor holds 1 XYZ Jan 80 Put at 5. What is the result if later XYZ falls to 65, and the put is exercised?
A profit of $1,000. The investor needed the stock down at 75 to breakeven, and the stock fell 10 points beyond 75.
Define a class of options.
All options with the same underlying interest and the same type (e.g. STC calls or STC puts)
Short 1 MNO Aug 40 Put at 4.50. MNO falls to 30, the put is exercised and the stock is immediately sold. Result?
A loss of $550. The breakeven is 35.50, but the stock fell 5.50 lower than 35.50.
True or False: Option writers want contracts to expire at- or out-of-the-money.
True. For options at- or out-of-the-money, the seller would retain the premium (maximum gain).
Calls and puts are the two ________ of options.
Calls and puts are the two types of options.
Consider the following: TNT Jun 80 call at 3 If TNT is trading at 78, how much intrinsic value does the option have?
0, it is out-of-the-money
A put option is in-the-money when the market price is ____________ the strike price.
A put option is in-the-money when the market price is DOWN below the strike price.
Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much time value does the option have?
$2.00 or 2 points
What is the maximum gain? Write 1 MNO June 35 Call at 2.70
The maximum gain is the premium = 270.00
True or False: Options are derivatives since their value is based on the changing value of an underlying instrument.
True
What is the maximum risk? Long 1 RFQ Nov 20 Put at 4.00
The maximum risk is the premium = 400.00
True or False: To close (sell) or to exercise for profit, option buyers want contracts to become in-the-money.
True
With options, what terms are synonymous with buyer?
Owner, holder, long
Consider the following: ABC Sep 45 Put at 6 If ABC is trading at 41, how much intrinsic value does the option have?
$4.00 or 4 points
Consider the following: TNT Jun 80 Call at 3 If TNT is trading at 78, how much time value does the option have?
$3.00 or 3 points
With options, what terms are synonymous with seller?
Writer, short
If exercised against, the writer of an equity put option is obligated to ____ the underlying stock.
If exercised against, the writer of an equity put option is obligated to buy the underlying stock.
The maximum gain for an option seller is the ____________.
The maximum gain for an option seller is the premium.
What is the maximum loss? Sell 1 MNO Dec 40 Put at 3.50
The maximum loss is the strike price - premium = 3650.00
What is intrinsic value?
The amount by which the option is in-the-money
An investor writes 1 DEF May 55 Call at 6. What is the investor’s strategy?
Bearish
An investor writes 1 DEF May 55 Call at 6. Later at expiration, if DEF has fallen to 53, is there a gain or loss?
A $600 gain on the premium
True or False: A 110 put with the market at 108 is out-of-the-money.
False, it is in-the-money.
Consider the following: ABC Sep 45 Put at 5 If ABC is trading at 41, how much time value does the option have?
$1.00 or 1 point
An investor holds 1 XYZ Jan 80 Put at 5. Later at expiration, if XYZ has held at 80, would there be a gain or a loss?
A loss of $500, since the option expires at-the-money
An investor holds 1 XYZ January 80 Put at 5. What is her strategy?
Bearish (to find strategy for put buyers, use the phrase PUT DOWN)
Bill writes 1 DEF May 55 Call at 6. Later DEF rises to 70 and the call is exercised, what is Bill’s result?
$900 loss. The writer could afford the stock rising to 61(breakeven), but the stock rose 9 points higher than 61.
If exercised against, the writer of an equity call option is obligated to _____ the underlying stock.
If exercised against, the writer of an equity call option is obligated to sell the underlying stock.
Jim is short 1 MNO Aug 40 Put at 4.50. Does Jim have a right or an obligation?
Obligation to buy at 40
An investor holds 1 XYZ Jan 80 Put at 5. Does she have a right or an obligation?
Right to sell at 80
What is time value?
The option’s premium minus the intrinsic value.
Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much intrinsic value does the option have?
0, it is at-the-money
Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim’s strategy?
Bullish
What is the maximum profit? Buy 1 RFQ May 105 Call at 2.40
The maximum profit is unlimited
An investor writes 1 DEF May 55 Call at 6. Does she have a right or an obligation?
Obligation to sell at 55
Define a series of options.
All options with the same underlying interest, expiration month, strike price and type (e.g. ABC May 60 Call)
