Financial Options Flashcards
why do option markets experience substantial growth in trading volume?
due to the increased use for hedging and investments
options is a derivate contacts that…
gives the option purchaser the right not the obligation to buy or sell a given amount of the underlying security at a. fixed strike price per uni for a specified time period
option premium
cost of the option
call (put) option
gives the buyer the option the right to buy (sell) foreign currency
payoff
a function of the value of the underlying on the exercise date
the underlying
the asset upon which the option is sold
long option P&L
payoff - option premium
short option P&L
payoff + option premium
ITM
in-the-money, if it would be profitable to exercise today (S>K for call)
ATM
At-the-money if the profit would be zero fi the option is exercised today (S=K for call)
OTM
out-of-money. if it is not profitable to exercise today (S<K for call)
Intrinsic value
the payoff one could get by exercising the option today
break even price (call option)
the spot price at which the buyer does not make any profit or call
future margins
deposits required to ensure that a clearing member can cover potential losses with their trading positions, help ensure clearing members can meet obligations
long call strategy
an option you have purchased granting you the right to buy from the writer at a set price
short call strategy
an option you have written by granting the buyer the right to buy from you , the righter at a set price
long put strategy
an option you have purchased granting you the right to sell the writer at a set price
short put strategy
an option you have written granting the buyer the right to sell to you, the writer, at a set price
covered call strategy
as per the short call but the underlying is held
option value
intrinsic value + time value
time value
the value of the option due to that the underlying can move favourably during the remaining time left until maturity
