Lesson 9 Flashcards
stock option
to buy or sell shares of an underlying stock at a set price on or before a set date
you can buy and sell options contracts on…
regular stocks, indexes, ETFs, futures contracts
call option
gives the holder the right, but not the obligation, to buy a specified number of shares of stock at a stated price within a specified period
put option
an option that gives the holder the right, but not the obligation, to SELL a specified number of shares of stock at a stated price within a specified period
ask
the lowest price one is willing to receive for an options contract
bid
the highest price one is willing to pay for an options contract
LEAPs
long-term options: options on individual stocks with maturities greater than one year
Canadian Derivatives Clearing Corporation
CDCC; the clearing corporation that issues and guarantees all equity, bond, an stock index positions on option exchanges in Canada
futures contract
agreement providing for the future exchange of a particular asset between buyer and seller at a specified date for a specified amount
short position (seller)
an agreement to sell an asset at a specified future date at a specified price
long position (buyer)
an agreement to purchase an asset at a specified future date at a specified price
offset
liquidation of a futures position by an offsetting transaction - buyers sell their positions and sellers buy their positions prior to the settlement of the contract (delivery)
futures margin
the good faith (Earnest money) deposit made by the buyer or seller to ensure the completion of a contract
zero-sum game
in reference to futures trading - the aggregate profits enjoyed by the winners must be equal to the aggregate losses suffered by the losers; gains and losses net to zero; buyer and seller gains/costs must be equal; the net exposure to changes in the commodity’s price must be zero
marked to the market
all profits and losses on a contract are credited and debited to each investor’s account every trading day
short (sell) hedge
a transaction involving the sale of futures (a short position) while holding the asset ( a long position)
long (buy) hedge
a transaction where the asset is currently not held but futures are purchased to lock in current prices
basis risk
the risk that hedgers face as a result of unexpected changes in basis (basis = cash price - futures price); the basis must be zero on the maturity date of the contract
financial derivative securities
derive all or part of their value from another (underlying) security
exercise (strike) price
the per-share price at which the common stock may be purchased or sold
expiration date
last date at which an option can be exercised (America: on and up to the expiration date, European: only ON the expiration date)
option premium
the price paid by the option buyer to the writer of the option, whether put or call
covered
put terminology; when a seller currently owns the share it is selling a Put option on
naked
when a seller DOES NOT currently own the shares they are selling a Put option on
right
to purchase a stated number of of common shares at a specified price within a specified time (usually a few weeks to a few months)
warrant
to purchase a stated number of common shares at a specified price with a specified time (often several years)
hedgers
buy/sell futures to offset risk; willing to forgo profit for reduced risk
speculators
buy/sell futures to gain a return
clearing houses/corps
corp separate from but associated w/ each exchange; exchange members must pay membership for these services; buyers and sellers settle with CORP, not with EACH OTHER ; helps maintain an orderly market and keeps obligations accountable
