Everything Options Flashcards
A contract that gives the buyer the right to sell 100 shares at a strike price on/before an expiration date is called what?
A Put Option
A person who owns a lot of shares of a particular stock would probably purchase a ______ to protect their investment from crashing
A Put Option
What happens to a put option of a buyer at the expiration date? Is anything else owed buy the buyer?
The contact becomes worthless and nothing else is owed by the buyer.
Ex: FB Dec 250 Put at $4.00
Who automatically receives payment from this contract and what are the obligations?
Who automatically has to pay for this contract and what are his/her rights?
The seller would receive the $4.00 automatically but obligated to buy 100 shares of the stock at $250 each if price falls to or below $250
The buyer has to pay $4.00 for the contract but has the right to sell the stocks at $250 each even if price falls to zero.
($4.00 x 100 shares = $400)
Ex: Facebook is currently trading at $250. Under the 33 days before Puts expiration section, the $215 strike price has a Delta of -.10. What does -.10 mean?
What does this mean for a seller of a Put?
In 33 days, there is only a 10% chance the the price will fall and stay below $215.
For the seller of the Put this means there’s only a 10% chance he will be required to buy 100 shares of the stock. He has a 90% chance of keeping the premium payout without the obligations of buying 100 shares of stocks at the $215 strike price.
Name 3 general rules if you want to sell a Put to collect premium payout with no intentions on buying the 100 shares at the strike price?
1) There needs to be a clear uptrend
2) Strike price needs to be 20% below current price
3) Needs to be with a big company. Big companies are less than likely to drop 20% in a short period of time.
Ex: Current price at $250. You sold a Put at a strike of $215 with the intention of collecting the a $4.00 premium but the price actually fell down to the $215 strike price. You don’t want to buy the 100 shares of stock. What can you do to recover?
What is this called?
What can you do to prevent max lost?
What should’ve you done
You can purchase a Put at a lesser strike price, say $210, with a lesser premium cost, say $3.50, and you’ll keep the difference of $.50.
This is called a Bull Put Credit Spread.
The most you can loose in the example is $5.00 ($215-$210= $5). But you can prevent this max lost by exiting the trade as soon as you see price falling.
When you Sell a Put and simultaneously buy a Put at a lesser strike price and cheaper premium cost is called what?
Under what conditions is this strategy used?
Bull Put Credit Spread.
Used only on uptrending stocks.
When using a Bull Put Spread, at what point do you enter the trade?
When price retraces to a support level.
A Call Option buyer has the right to _____ 100 shares at the strike price.
What is the ideal scenario for this buyer?
A Call Option buyer has the right to BUY 100 shares at the strike price.
The ideal scenario is the price to go up so they can sell the option at a higher price.
A Put Option buyer has the right to _____ 100 shares at the strike price.
What is the ideal scenario for this buyer?
A Put Option buyer has the right to SELL 100 shares at the strike price.
The ideal scenario is for the price to go down to sell the option at a higher price.
In regards to the movement of a stock, either up, down, or sideway consolidations, what is the main difference between buying a Call/Put or selling a Call/Put?
When buying a Call, profits can only be made when prices go up and vise versa for selling a Put, 1 of 3 directions. When Selling a Call/Put profits can be made in 2 of 3 directions.
Statistically the odds are better when selling a Call or a Put.
What are the two directional ways profits can be made when Selling a Call or Put?
When selling a Call, profits can be made when price moves down or sideways.
When selling a Put, profits can be made when prices moves up or sideways.
Which Defensive Sectors ETF of the market are considered essentials and known to be recession proof? They also have low volatility and slow to moderate growth.
Health Care (XLV) Consumer Staples (XLP) Utilities ( XLU)
Why is it a good idea to have a few stocks in the defensive sectors within your portfolio?
They are not effective much in a bear market. They are considered necessary items.
