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M6A > Options > Flashcards

Options Flashcards

1
Q

What’s the moneyness?

A

The potential profit or loss if the option is exercised immediately.

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2
Q

What’s the Intrinsic Value of a call option?

A

Intrinsic Value = Current Market Price - Option Stike Price

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3
Q

What’s the Intrinsic Value of put option?

A

Intrinsic Value = Strike Price - Current Market Price

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4
Q

What’s the impact of following factors on Option Price?

1) Price of underlying share

2) Exercise Price

3) Time to expiration

4) Volatility of underlying share

5) Risk-free interest rate

6) Expected dividends

A
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5
Q

What’s the payoff of an option holder?

A

Payoff is the gain before deducting the option price or premium

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6
Q

The call option writer breaks even if ______

A

The underlying price moves above the exercise price by an amount equal to the option price.

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7
Q

The breakeven point for _____ is the same.

A

Call option buyer and writer

Put option buyer and writer

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8
Q

The breakeven poitn for call option buyer and writer is _____

A

The same

If the underlying price moves above the exercise price by an amount equal to the option price

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9
Q

The put option writer breakeven if ____

A

If the price of the underlying falls below the exercise price by an amount that is equal to the premium received

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10
Q

What’s Put-Call Parity Theory Formula?

A

C + PV (X) = p + S

Current price (market value) of the European Call + Present Value of the strike price of the European Call discounted from the expiration date at risk-free rate = Current price (market value) of the European Put + Current market value of the underlying share

Esentially, a portoflio of a call option and cash equal to the present value of the option’s strike price, has the same expiration value as a portfolio comprising of the corresponding put option and the underlying share.

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11
Q

How to use the Put-Call Parity Theory to create sysnthetic securities, i.e.

A synthetic bond

A synthetic share

A

A synthetic bond: PV (X) = p + s - c

A synthetic share: s = PV (x) + c - p

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12
Q

What’s the underlying presumptions to use Call-Put Parity Theory to create synthetic securities? (3)

A

There’re no dividends

Strike prices for calls and puts are the same

The number of shares of stock are equal to the number of shares represented by the options

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13
Q

What’s a synthetic long stock?

This’s a ____ alternative to _____

A

Long at-the-money call + Short at-the-money put with the same expiration date creates a synthetic long in a stock.

Low cost alternative to purchasing the share

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14
Q

What’s a synthetic short position?

A

Shorting at-the-money calls and buying a an equal number of at-the-money puts on the underlying share, having the same expiration date.

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15
Q

What’s synthetic Long Call / Long Put / Short Call / Short Put?

A

Long Call = Long underlying + Long Put

Long Put = Short underlying + Long Call

Short Call = Short underlying + Short Put

Short Put = Short Underlying + Short Call

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16
Q

In the Black-Scholes formula, the value of an option is determined by ___ factors.

which are ___

A

Six

Underlying share price

Strike price

Time to expiration

Implied volatility

Dividend status

Interest rates

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17
Q

What’s the Volaitility Greeks?

A

The Greeks are a collection of statistical values that give investors an overall view of what drives option premiums and the changes in pricing model inputs.

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18
Q

What are the 5 Greeks and their formula?

A
  1. Delta: Major sensitivity measure, represents the first-order relationship between the option price and the underlying price.

Delta = Change in option price / Change in underlying price

  1. Gamma: Gamma is the sensitivity of delta to changes in the underlying asset price. So it’s a second-order relationship between option price and the underlying asset price.

Gamma = 2V/S2

  1. Vega is the relationship or sensitivity of the option price with its volatility.
  2. Theta represents the sensitivity of the option price to the time to expiration. The option’s theta is the rate of time value decay.
  3. Rho: sensitivity of the option price to the risk-free rate.
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19
Q

The delta of the call option is between ___ and ___.

A

0 and 1

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20
Q

If gamma is large, delta changes ____ and ____ estimation of sensitivity to changes in the underlying asset price.

A

Fast

does not provide a good

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21
Q

Gamma is usually large when the option is ____ and _____

A

the option is at-the-money and close to expiration

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22
Q

Under what situation, delta hedges work poorly?

A

When the option is at-the-money and close to expiration

When Gamma is large

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23
Q

What’s the volatility of the underlying asset?

A

Standard Deviation of the continuously compounded return on the underlying asset

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24
Q

Vega is larger when the option _______

A

the option approaches being at-the-money

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25
Q

Vega are ___ for call and put option because ____

A

Positive

Volatility increases the price of both calls and puts

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26
Q

Theta of call / put option is ____

A

always negative

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27
Q

What’s the risk-free rate in Rho?

A

Continuously compounding rate of return on the risk free security whose maturity corresponds to the life of the option

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28
Q

Calls have a ____ correlation with the risk-free rate

Puts have a ____ correlation with the risk-free rate

A

Positive

Negative

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29
Q

____ style options are not very sensitive to risk free rate.

A

European style

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30
Q

If a short put position is combined with the purchase of a fixed rate note, the yield of the note is ____

A

Increased

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31
Q

What’s a yield enhancement strategy?

A

Short a put + Buy a fixed rate note

The yield of the note is enhanced

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32
Q

What’s a bull equity-linked note?

A

Structuring a fixed income instrument with an embedded short

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33
Q

What is a straddle option strategy?

A

Involve simultaneously purchase of both an ATM call and an ATM put

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34
Q

What’s the downside of a strangle option strategy? When it happens?

A

The downside is limited to the sum of the premiums paid.

This happens if the stock price remains between the strike prices of the options that are purchased.

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35
Q

What’s an option spread?

A

Option spread involves simultaenous purchase and sale of options of the same class on the same underlying security.

However the strike prices and / or the expiration dates are different.

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36
Q

Spreads _____ the net cost of buying an option.

A

Reduce

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37
Q

A naked option seller using spreads to _____

A

lowers margin requirements

38
Q

What’s a bull call spread?

What’s the upside/downside?

What’s the maximum gain/loss?

When loss occurs?

What’s the market view?

A

A bull call spread is a vertical spread created by buying an in-the-money call option while simultaneously selling a higher striking out-of-the money call opion.

The underlying security and the expiration month are the same.

Upside is limited, and the maximum gain is acheived when the share price moves above the higher strike price of the two calls.

The gain is equal to the difference between the strike prices of the two call options minus the initial debit.

Downside is also limited and loss occurs if the underlying declines.

Bullish market view

39
Q

What’s a Bull Put Spread?

What’s upside / downside?

When loss occurs?

What’s the market view?

A

Selling a higher striking in-the-money put option and buying a lower striking out-of-the money put option.

Upside is limited to the initial credit. The options expire worthless if the share price closes above the higher strike price on expiry.

Downside is also limited to the difference between the strike prices of the two puts minus the net credit received.

Loss occurs if the share price drops below the lower strike price on expiration date.

Market view: The options trader thinks that the price of the underlying asset rise moderately in the short-term.

40
Q

What’s a Bear Call Spread?

What’s upside / downside?

When loss occurs?

What’s the market view?

A

Buying call options of a certain strike price and selling the same number of call options of lower strike price on the same underlying and expiry.

Upside is limited to the initial credit received. For this to occur, the share price must close below the strike price of the lower striking call sold at expiration date. Here, both options expire wortheless.

Downside: Maximum loss occurs when the share price rises above the stike price of the higher strike call at the expiration date.

The maximum downside is equal to the difference in strike prices between the two options minus the initial credit.

Market view: The price of the underlying asset will go down moderately.

41
Q

What’s a Bear Put Spread?

What’s upside / downside?

When loss occurs?

What’s the market view?

A

Buying a higher striking in-the-money put option and selling a lower striking out-of-the money put.

Upside: If the underlying closes below the strike price of the out-of-the money puts on expiry, maximum profit is earned.

The maximum profit is equal to the difference in strike prices minus the debit taken when the position was entered.

Downside is maxi mum if the share price rises above the in-the-money put option strike price on expiry. The entire initial debit is lost.

Market view: The trader reduce the cost of establishing the bearish position by shorting the OTM put, but gives up the chance of making a huge profit if the underlying falls significantly.

42
Q

What’s a Butterfly Spread?

A

A bull spread + A bear spread

Buy 1 ITM option Sell 2 ATM option and Buy 1 OTM option.

There’re 3 strike prices involved.

43
Q

What’re Long Call Butterfuly Spread and Long Put Butterfuly Spread? When investors use these strategies?

What’s the maximum loss?

A

Investors take long butterfly call or put spread positions if they do not expect much movement in the underlying till expiry.

The maximum loss is limited to the initial debit.

44
Q

What’s vertical spreads?

A

Options of the same class, same underlying security, same expiration month but having different strike prices

45
Q

Horizontal or calendar spreads?

A

Involve options of the same underlying, same strike prices but with different expiration dates.

46
Q

What’s the horizontal/calendar spreads used by trader if he expects the volatility to increase?

Sell_____options and buy _____ options

A

Sell short-dated options and buy long-dated ones

47
Q

Diagonal spreads?

A

Involve options of the same underlying security but different strike prices and expiration dates.

48
Q

Condor Spread?

A

A condor spread is a variation of the butterfly spread as it involves 4 options.

However, all 4 options have different strike prices, whereas there’re three strike prices in a butterfly spread.

49
Q

The range of strike price of Condor Spread is ____ compared to Butterfly Spread.

A

Wider

50
Q

What’s a market neutral option strategy where the expected volatility is low?

A

Ratio Spread

51
Q

What’s the upside/downside of ratio spread?

A

Upside is limited

Downside is unlimited

52
Q

All option contracts on SGX are _____

A

American style futures options

53
Q

What’s the option strategy taken by a hedger who wants to take on a very limited risk exposure?

A

Zero-Cost option, which involves buying an option and selling another

54
Q

A collar is established by _____

A

Buying a protective put while writing an out-of-the-money covered call.

55
Q

What’s a cash extraction strategy?

A

An option can also be used as part of a cash extraction strategy when the investor, who has the underlying asset and needs cash, sells it and buys call options to maintain upside exposure to the underlying asset.

56
Q

What’s the option strategy to use if someone expects a big move in a stock but unsure of the direction?

A

Long Bull Straddle: BUY both the call and the put (at-the-money or in-the-money)

57
Q

What’s the option strategy to use if someone expects little move in a stock but unsure of the direction?

A

Short (Bear) Straddle: Sell both the ATM call and ATM put, hoping that both the options will expire worthless.

58
Q

What’s the call/put option for a bull view (directional) on stock price?

A

Buy a call + Sell a put

59
Q

What’s the call/put option for a bearish view (directional) on stock price?

A

Sell a call + buy a put

60
Q

What’s the theta for a long straddle (bull) strategy?

A

Theta is negative because there’re two long option positions (option time value will decay over time)

61
Q

What are neutral market outlook strategies?

A

Straddles

Covered Call

62
Q

A strangle is also known as the ____ .

It involves ________

A

A strangle is also known as the long strangle.

It involves simultaneously BUY a slightly OTM call and BUY a slightly OTM put of the same underlying stock and expiration date.

63
Q

A strangle strategy is ____ compared to a straddle strategy because ____

A

Less costly

because two OTM options are used. (OTM options will have a relatively lower premium compared to ATM)

64
Q

In a strangle strategy, the strike price of the call option would be ____ compared to the strike price of the put option.

A

Higher

Since the put is also OTM, the strike price will be lower than that of the OTM call.

65
Q

What’s debit bull vs. credit bull?

A

Debit Bull = Bull Call Spread

Credit Bull = Bull Put Spread

66
Q

In the case of calendar spread, the ____ option is bought and the ____ option is sold in case _____

A

Short-dated

Long-dated

volatility is expected to decline

67
Q

A call option on USD at a strike price of AUD 1.35 will help the investor ____

The option will give the investor the right to _____

If USD appreciates, the value of the call option will _____

A

Gain from any appreciation in USD or depreciation in AUD.

Buy USD at 1.35 AUD per USD.

Increase

68
Q

Selling a put option on USD with AUD 1.35 strike price will also help the investor _____

A

Make a profit equal to the premium pocketed

69
Q

A collar is established by _____

A zero-cost collar is named for ____

A

Buying a protective put while write a OTM covered call.

The call option is sold with a strike price where the premium received is equal to the premium paid for the put purchased

70
Q

Time value is the lowest at ____

A

Expiry

71
Q

Time value = _____ for ATM (or OTM) options and why?

A

Option price for ATM (or OTM) options as the intrinsic value of ATM or OTM options is zero

Time Value = Option price - Intrinsic Value

72
Q

Higher volatility may ____ the time value because _____

A

Increase

Because the chance of the option becoming ITM (or deeper ITM) increases

73
Q

Time value decays ____ when the time to expiry draws near

A

faster

74
Q

The profits made by the call option writer are ____ the loss suffered by the holder.

A

equal to

75
Q

What’s the intrinsic value of a call option?

A

Market Price - Strike Price

76
Q

Futures price and option price are ____ correlated for CALLS

A

Positively

77
Q

Futures price and options price are positively correlated for ____

A

Calls

78
Q

Binomial model is more suitable for _____ options as it _____

A

American

Incorporate the early exsercise future

79
Q

The price of an option cannot be _____

A

Negative

80
Q

If the risk is zero, the price of the option can be _____ depending on _____

A

Zero depending upon the strike price and the underlying price

81
Q

Only ___ options have positive delta.

A

Call

82
Q

If the delta of a long option position is 0.4. A $1 rise in the underlying asset will lead to ____ in the ____ option price.

A

40 cents increase in the call option price

delta = 0.40 = $0.40/$1.0

83
Q

If a graph between the gamma of an option (vertical-axis) and its underlying share price (horizontal-axis) is plotted, it shape will approximately be _____

A

Bell-shaped curve with gamma being the highest for ATM strike price

84
Q

Theta is the quantitative measure of the rate at which _____

A

The quantitative measure of the rate at which the time value of an option is eroded.

85
Q

Theta is ____ for both long call and long put positions

A

Negative

86
Q

Vega indicates _____

A

An absolute change in option value for 1% change in volatility.

87
Q

Vega is larger as the option ____.

A

closer to being ATM

88
Q

Vega for both call and put options are _____ because ___

A

Positive

Increased volatility leads to higher option price

89
Q

Vega is measured by _____

A

The change in value of an option , i.e. the premium over a 1% change in market volatility

90
Q

RHO is ____

A

The continuously compounding rate of return on the risk free security whose maturity corresponds to the option’s life.

91
Q

Option Price =

A

Intrinsic Value + Time Value

92
Q

Breakeven point for a call buyer =

Beakeven point for a call writer =

Breakeven point for a put buyer =

Breakeven point for a put writer =

A

Strike price + premium paid

Strike price + premium received

Strike price - premium paid

Strike price - premium received

M6A (5 decks)

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