Options Flashcards
Option Premium Formula
Premium = Intrinsic Value + Time Value
IV: In the money amount
Time Value: time to expiration, market volatility
Life of an Option
Standard: 9 months (max)
LEAPS: lives up to 3 years
Close-Out (vs exercise)
Means trade, NOT exercise. Investor executes an opposite transaction on the same series of option.
American Style Option
Exercised any time up to expiration. Always for equity.
European Style Option
Only exercised day preceding expiration. Always for foreign currency.
Long Straddle
Buy a call and put: seeking volatility
Short Straddle
Sell a call and a put: seeking stability
Straddle vs. Combination
Straddle: same expiration month and strike
Combo: dif expiration months and/or dif strike
Spread
Sale and purchase of two options of the same type of option and different strikes
Buyer of spread = debit
= desire for widening (5 letters (buyer) –> 6 letters (debit/widen))
Seller of spread = credit
= desire to narrow (number of letters in all words stays the same)
Vertical Spread: Dominant Leg
Option w/ larger premium, determines if investor is buyer/seller
For calls: this is lower strike price
For puts: higher strike price
Index Options
If exercised: receive or deliver CASH. Settlement is NEXT BUSINESS DAY. Broad based indices: S&P100 (OEX), S&P500 (SPX), Willshire
VIX Options
Moves opposite direction of market. Based on PREMIUMS for SPX options over next 30 days. Cash settled.
Foreign Currency Options
Spec/hedge movement of exchange rates on foreign currencies relative to USD. Interbank market: market in which currency spot prices are established, unlimited hrs, unregulated, decentralized. Currency options trade on Philly Stock Exchange.
REMEMBER: NO DOLLAR OPTIONS
1 point = $100 (2.25=$225).
You deliver cash in USD, not currency.
Yield Based Options
Based on YIELD of Treasuries. Exercise causes deliver of cash.
Option Account Opening Procedure
1) Gather client info through Option Acct. Agreement
- Send OCCs options disclosure doc (ODD)
2) Registered Options Principal Approval
- approval to certain levels of trading
3) Allow “opening” transaction (after approval)
4) Within 15 days AFTER approval, client must sign and return agreement. If not, only closing transactions permitted.
Deadlines for Equity Options
Expiration: 11:59PM ET on Sat following 3rd Fri of month
Trading: 4:00PM ET on business day before expiration
Submission of exercise notice to broker: 5:30PM ET on business day before expiration
AT expiration OCC auto exercises all options that are in the money buy at least $.01
Exercise Limits
Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply CUMULATIVELY to all accounts that a customer maintains at all brokerage firms, not for each account at each firm.
