Options

Question 1

What is the intrinsic value on a call?

Answer 1

CMVs > SP = ITM

Question 2

What is the intrinsic value on a put?

Answer 2

CMVs < SP = ITM

Question 3

What is intrinsic value?

Answer 3

time value + intrinsic value = premium
the more time you have = more value
more time = higher premium

Question 4

What is exercising an option?

Answer 4

purchasing the underlying stock

acting upon the option

Question 5

What is expire?

Answer 5

You do nothing with the option and it expires

Question 6

What is closing the position?

Answer 6

Trading

Question 7

When a buyer is bullish on a call…

Answer 7

Right to buy
@ state price/time
100 shares of stock

Question 8

When a buyer is bearish on a call….

Answer 8

Obligated to sell
@ predetermined price/tie
100 shares - if exercised

Question 9

Buying is also known as

Answer 9

Hold/Long

Question 10

Selling is also known as

Answer 10

Short/Write

Question 11

What is the most you can lose when you BUY an option

Answer 11

ONLY your premium!

Question 12

What is the most you can gain when you BUY?

Answer 12

Max Gain = Unlimited

Question 13

What is the BE calc for buying an option

Answer 13

SP+P = BE

Question 14

What is the BE calc for selling a call

Answer 14

SP - P = BE

Question 15

A put is more valuable when?

Answer 15

As the price of the stock declines

Question 16

What is a naked call?

Answer 16

Selling stock you don’t own

Question 17

When do you have unlimited risk?

Answer 17

Through uncovered calls and selling stock short

Question 18

What is a hedge?

Answer 18

Investing in stock and using an option to

1. Protect/guard against risk
2. Profit - increase return (generate income)

Question 19

What does a put do?

Answer 19

Allows us to exercise our right to sell or buy

Question 20

What is a straddle?

Answer 20

Buying both types (call/put)
or
Selling both types (call/put)

Question 21

What is a long straddle designed for?

Answer 21

Help with volatility (unsure of market movement)

Question 22

What is the BE on long straddles?

Answer 22

SP + & - BOTH premiums

Long 1 XYZ Sep 40 call @ 4
Long 1 XYZ Sep 40 put @2

BE = 46/34

Question 23

What is a short straddle used for?

Answer 23

Help with a stable market

Question 24

What is a combination?

Answer 24

A straddle with different strike prices

Question 25

Why would someone write a combination?

Answer 25

they are neutral on the market

Question 26

What is a spread?

Answer 26

The buying and selling of the SAME type

Question 27

Call Spread

Answer 27

the lower SP is more dominant CAL

Question 28

How do you find the max gain / loss on a call spread?

Answer 28

``` Find one (premium) and then you will know the other Remmember the difference is always between the two SP ``` Long 1 XYZ Nov 30 call @4 Short 1 XYZ Nov 40 call @1 BE = 33 Max loss = $300 Max gain = $700

Question 29

When considering a Put Spread

Answer 29

The higher premium dominates - determines attitude

Question 30

When does the options agreement need to be signed?

Answer 30

15 days from account approval

Question 31

What does the CBOE do?

Answer 31

Standardize options Clearing House Commission have FIFO or Random assignment

Question 32

How do options settle?

Answer 32

T+1

Question 33

How does the OCC assign exercise notices?

Answer 33

Random method only.

Question 34

Who does the OCC work with?

Answer 34

Institutional

Question 35

When does options trading cease?

Answer 35

3rd Friday of expiration month @4pm EST

Question 36

What does the OCC do with all of the options ITM?

Answer 36

Exercises them...forces you to close

Question 37

When do options expire?

Answer 37

11:59 pm Friday

Question 38

How do you determine a position limit?

Answer 38

"What is the same side of the market" (market attitude)

Question 39

Options are affected by dividends? T or F

Answer 39

False

Question 40

How are options taxed?

Answer 40

Short term CG tax (all options are 9 mo in length)

Question 41

What is a married put?

Answer 41

When you purchase on the same day stock and a put option as a hedge

Question 42

What happens when there is a split on an options contract?

Answer 42

Even - effects contracts (2:1 - anything not for 1 is uneven) Uneven - effects shares and SP (like stock split)

Question 43

When you have a non-equity option

Answer 43

It settles in cash, not shares

Question 44

OEX

Answer 44

Is the S&P 100

Question 45

SPX

Answer 45

S&P 500

Question 46

What is an American option

Answer 46

Ability to exercise at any time

Question 47

What is a European option

Answer 47

Option to exercise only at experiation

Question 48

When concerned with imports what do we do?

Answer 48

Risk is the concern that the US $ will decrease Exporters buy Puts Importers buy Calls

Question 49

When concerned the exports what should we do?

Answer 49

``` Risk is the concern that the US dollar will increase Exporters buy Calls Importers buy Puts ```