Options Flashcards
What’s the moneyness?
The potential profit or loss if the option is exercised immediately.
What’s the Intrinsic Value of a call option?
Intrinsic Value = Current Market Price - Option Stike Price
What’s the Intrinsic Value of put option?
Intrinsic Value = Strike Price - Current Market Price
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
What’s the payoff of an option holder?
Payoff is the gain before deducting the option price or premium
The call option writer breaks even if ______
The underlying price moves above the exercise price by an amount equal to the option price.
The breakeven point for _____ is the same.
Call option buyer and writer
Put option buyer and writer
The breakeven poitn for call option buyer and writer is _____
The same
If the underlying price moves above the exercise price by an amount equal to the option price
The put option writer breakeven if ____
If the price of the underlying falls below the exercise price by an amount that is equal to the premium received
What’s Put-Call Parity Theory Formula?
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.
How to use the Put-Call Parity Theory to create sysnthetic securities, i.e.
A synthetic bond
A synthetic share
A synthetic bond: PV (X) = p + s - c
A synthetic share: s = PV (x) + c - p
What’s the underlying presumptions to use Call-Put Parity Theory to create synthetic securities? (3)
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
What’s a synthetic long stock?
This’s a ____ alternative to _____
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
What’s a synthetic short position?
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.
What’s synthetic Long Call / Long Put / Short Call / Short Put?
Long Call = Long underlying + Long Put
Long Put = Short underlying + Long Call
Short Call = Short underlying + Short Put
Short Put = Short Underlying + Short Call
In the Black-Scholes formula, the value of an option is determined by ___ factors.
which are ___
Six
Underlying share price
Strike price
Time to expiration
Implied volatility
Dividend status
Interest rates
What’s the Volaitility Greeks?
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.
What are the 5 Greeks and their formula?
- 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
- 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
- Vega is the relationship or sensitivity of the option price with its volatility.
- Theta represents the sensitivity of the option price to the time to expiration. The option’s theta is the rate of time value decay.
- Rho: sensitivity of the option price to the risk-free rate.
The delta of the call option is between ___ and ___.
0 and 1
If gamma is large, delta changes ____ and ____ estimation of sensitivity to changes in the underlying asset price.
Fast
does not provide a good
Gamma is usually large when the option is ____ and _____
the option is at-the-money and close to expiration
Under what situation, delta hedges work poorly?
When the option is at-the-money and close to expiration
When Gamma is large
What’s the volatility of the underlying asset?
Standard Deviation of the continuously compounded return on the underlying asset
Vega is larger when the option _______
the option approaches being at-the-money