Midterm G5: Option Valuation Tools

Question 1

Allows you to buy a given asset at a certain exercise price

Answer 1

Option

Question 2

An important variable to understand when entering into an options contract

Answer 2

Contract size

Question 3

Options have a limited lifespan and expire on standard expiry days set by exchange

Answer 3

Expiry date

Question 4

The day on which all an exercise options in a particular series expire and is the last day of trading for that particular series

Answer 4

Expiry day

Question 5

The predetermined buying or selling price for the underlying shares if the option is exercised

Answer 5

Exercise price

Question 6

The anchor price at which the two parties (buyer and seller) agree to enter into an options agreement

Answer 6

Strike price

Question 7

Is the money required to be paid by the option buyer to the option seller or writer.

Answer 7

Premium

Question 8

Is arrived at by the negotiation between the taker and the writer of the option

Answer 8

Premium price

Question 9

Types of options

Answer 9

Call option
Put option

Question 10

Gives the option holder (buyer), the right to buy the underlying asset at a particular price which is fixed (strike) for that particular timeframe (expiration date)

Answer 10

Call option

Question 11

Give the right in the hands of the buyer to sell the underlying security by a particular date for the strike price, but he is not obligated to do so

Answer 11

Put options

Question 12

Displays the underlying stock price movement using a discrete-time binomial lattice (tree) framework

Answer 12

Binomial model

Question 13

Generally measure the sensitivity of the option price to various parameters that impact the value of an option

Answer 13

Option Greeks

Question 14

Measures the rate of change of options premium based on the directional movement of the underlying

Answer 14

Delta

Question 15

Rate of change of delta itself

Answer 15

Gamma

Question 16

Rate of change of premium based on change in volatility

Answer 16

Vega

Question 17

Measures the impact on premium based on time left for expiry

Answer 17

Theta

Question 18

Measures the sensitivity of the interest rate on the value

Answer 18

Rho

Question 19

Is also highly dependent on the volatility, the market expects the stock to display up to expiration

Answer 19

Options time value

Question 20

Have a higher probability for the option to be profitable, or in the money by expiry

Answer 20

Stocks with high volatility

Question 21

One of the metrics used to measure volatile stocks

Answer 21

Beta

Question 22

Measures the volatility of a stock when compared to the overall market

Answer 22

Beta

Question 23

Helps you determine the possible magnitude of future moves of the underlying stock

Answer 23

Historical volatility

Question 24

Is what is implied by the current market prices and is used with theoretical models

Answer 24

Implied volatility

Question 25

It helps set the current price of an existing option and helps options players assess the potential of a trade.

Answer 25

Implied volatility

Question 26

The best known options pricing method

Answer 26

Black-Scholes model

Question 27

The model’s formula is derived by multiplying the stock price by the cumulative standard normal probability distribution function

Answer 27

Black-Scholes model