Opening and Closing Positions Flashcards
Opening and Closing Positions: Buyers Make?
A: Opening Purchases - Establishing or adding a long position.
B: Closing Sales - elimination or reducing a long position, ie: sell a call or sell a put.
Opening and Closing Positions: Sellers Make?
A: Opening Sales - Establishing or adding to a short position. Order tickets must be marked covered or uncovered, ie: sell a call or sell a put.
B: Closing Purchases - eliminating or reducing a short position, ie: buy a call or buy a put.
Call Buying: Reasons for Buying a Call?
a: Participate in the upward movement of a stocks price.
if the stock price goes up, the investor could buy the stock at the set strike price and then sell it at a higher price in the market.
b: Gives the investor unlimited upside profit potential.
C: gives the investor limited loss potential.
The most that could be lost is the premium paid to purchase the call.
d: Offers the investor leverage and diversification.
Instead of buying just one stock, the investor could buy options for several stocks.
e: Secures a future price in todays market because of the set exercise price of the option.
f: Hedges a short sale.
Long Calls can be used to protect or hedge short stock positions.
Investors who Buy a Call as an opening purchase do what 3 things?
a: **Exercise the option and buy the stock.
b: Closethe position by selling the option contract to another investor.
c: Let the option expireunexercised and lose the premium paid.
Call Writing: Reasons for Writing (Selling) a Call
a: Call writing allows investors to receive premium income when a neutral or down market is expected and would improve the rate of return on their investments.
Covered Call Writing
Covered Call Writing - offers premium income with downside protection and is the most conservative options position possible
A Call Writer would be considered Covered if:
a: Owned the underlying stock, or
b: obtained an Escrow or Depository Receipt from a bank certifying that the stock is at the bank and will be delivered if the call is exercised or
c: was “long” a call with an equal or lower exercise priceand the short call must expire at the same time or before the long call.
d: Owned Convertible Bonds, Preferred Stock, or Warrants provided they are immediately convertible or exchangeable for common stock and do not expire before the short call(s).
When an investor Sells a Call as an Opening Sale, one of the following will occur
a: The Option will be exercised, and the investor will sell the stock.
b: the writer will buy the option to close the position.
c: the option will expire unexercised, and the writer keeps the premium.
Uncovered Call Writing
is the most speculative position which can be done in options trading. The investor receives the premium income but has unlimited loss potential.
When an Investor Sells a Call as an Opening Sale, one of the following will occur:
a: the option will be exercised and the investor will sell the stock
b: the writer will buy the option to close the position.
c: the option will expire unexercised and the writer keeps the premium.
