Investments Ch 3 Flashcards
A financial instrument whose value is based on an underlying asset (such as a stock) or a group of assets (such as a benchmark)
Derivative
The minimum price an option will command. Is the difference between the market price of the underlying asset and the exercise price of the option.
Intrinsic value
The amount by which the market price of an option exceeds its intrinsic value
Time premium
The price at which the stock can be purchased or sold on exercise of the option.
Exercise Price/strike Price
The market price (cost) of an option
Premium
As the option approaches its expiration date, the market price of the option (premium) approaches its _________
Intrinsic value
A contract that gives the Holder the right to sell a specific number of shares of common stock and a set price for a given period of time until the contract expires.
Put
Intrinsic value of a put equals exercise Price minus ____ price
Market
When the market price is______ the exercise Price, a put is in the money.
Less than
When the market price is greater than the exercise price, a put is______
Out of the money
One option involves rights or obligations relative to ______ shares.
100
A ______ is a contract that gives the Holder the right to Purchase a specific number of shares of common stock at a set price for a given period of time.
Call
Investors buy calls when they are _______.
Optimistic or bullish
Call writers or sellers seek _______.
Premium income
If an individual writes a ________, the call is written on stock already owned by the call writer.
covered call
Call writers are ____________. They believe the stock will not increase in value, and therefore, the options will not be exercised.
Pessimistic (bearish)
The selling of a call without owning the stock is called _________.
naked call writing.
The writer seeks premium income.
Intrinsic value of a call = Market Price - ________.
Exercise Price of the underlying stock.
When the market price is _________ the exercise price, the call is in the money.
greater than
When the market price is ________ the exercise price, the call is out of the money.
less than
What is the riskiest option position?
Selling a naked call
If the price of the stock rises, the seller of the option is forced to buy the stock at the higher market price in order to supply it to the option buyer. This is the riskiest option because the stock may rise without limit.
As the time to expiration diminishes and the option approaches expiration, its value __________.
Declines
Call Option Taxation (9 months or less)
At the time of purchase, the premium paid is a _____________.
When exercised, the premium is _______ in the basis of the stock.
nondeductible capital expenditure
included
Taxation for the call writer
- If the option lapses, the premium received is a ___________.
- If the option is exercised (covered call), the premium received is added to the __________.
short-term gain
sale price
(can be a long-term gain if the underlying security was held more than 12 months. Otherwise, it’s a short-term gain.)
Taxation for the call holder
If the option is not exercised, then the option is considered sold (it expires) and produces a short-term _______.
Loss
When a PUT option lapses, the premium received by the writer is ______.
short-term gain
These long-term options have maturities ranging up to 2 years and beyond. They allow options buyers to assume positions for anticipated long-term market movements.
Long-Term Equity Anticipation Securities
An agreement between a buyer and a seller through a commodity exchange for the future delivery of a commodity at a specified date for a specified price.
Futures contract
FUTURES CONTRACT
_______ means settlement.
_______ means buyers sell their positions and seller buy their positions sometime prior to delivery.
Delivery (for example, delivery of pork bellies)
Offset
The current market price of commodity in the Cash market
Spot price
The number of future contracts trading for particular commodity on any given day
Open interest
Future contract
The maximum permissible price increase or decrease relative to the settlement price on the previous day
Daily limit
The three main types of futures contracts
Commodity futures
Financial futures
Foreign currency futures
FUTURES CONTRACT
A _______ position is held by the party who wants to buy the commodity / financial.
A ______ position is held by the party who wants to sell the commodity /financial.
long (bullish)
short (bearish)
DIFFERENCES BETWEEN CALLS AND WARRANTS
________ are issued by corporations whereas ______ are created by individuals on exchanges.
_______ typically have maturities of at least several years whereas listed _____ generally expire within 9 months.
_____ are standardized where as ________ are not.
Warrants are issued with _______ intrinsic value.
Warrants / calls
Warrants / calls
Call options / Warrant terms
No
An accredited investor is defined as an individual with a net worth of ______, one individual with an annual income of _____________, or a couple with a joint income of ____________.
$1,000,000 / $200,000 / $300,000
Remember the 1-2-3 test.
If an issue is offered privately, it is not considered to be a public offering and is exempt from formal registration. The offering can be sold to a maximum of ______ non-accredited investors and ________of accredited investors.
35 / an unlimited number
Futures contracts are not _______. They are regulated by the Commodity Futures Trading Commission and not by the SEC.
Securities
Total risk is expressed by __________ while systematic risk is expressed by _______.
standard deviation / beta
The combination of systematic and unsystematic risk that an investment or portfolio presents
Total risk (portfolio risk)
Unsystematic risk can be reduced through _________ by owning securities of companies in different industries with ________ or ______ or ________ correlations.
low positive, zero, negative
Systematic risk _______ be minimized by owning more securities.
cannot
Conventional wisdom indicates that _____ stocks in differing industries will greatly reduce unsystematic risk.
15
The risk that a foreign government will default on its loan or fail to honor business commitments because of a change in national policy.
Political risk
A volatile stock is ______ attractive to a speculator than an option whose price tends to be stable.
MORE.
