options Flashcards
When do most options expire?
9 months
What are leaps?
Long. term options that last up to three years
Two primary types of options contracts?
- Equity (stock options)
- Index options
Where do options primarily trade?
Chicago Board of Options Exchange
What time zone do options trade in?
CT
What type of security are options?
Derivative security
What defines a derivative security?
The investment value is derived from price changes in in underlying asset
Difference between equity options and index options?
Equity options derive their value from price fluctuations of specific stock while index options from an index’s value
What three things are options contracts generally helpful for?
- Speculation
- Protection
- Income
What is the options premium?
The cost of an option
How much is the premium for an option?
At least the difference between the “right” price and the current market price
What does “debit” mean in options language?
The money paid to purchase an investment
What phrase means an option has intrinsic value?
In the Money
What does an option seller hope happens to the option?
It is never exercised
What is credit in options language?
Money received by the holder for the option
What does “assignment” mean in options language?
When a writer’s option is exercised and they are forced to perform obligation
Who is the writer in an option?
The seller
When do options specifically expire?
Expire at 11:59pm ET on the third friday of the expiration montha
How long can long-term options last?
3 years
What four things is the Options Clearing Corporation responsible for?
- Issuing
- Standarizing contracts
- Guaranteeing exercise
- Clearing house
Who always issues options?
The OCC
Where is the secondary market of options?
THe Chicago Board Options Exchange
What determine premiums in options?
Demand in the market
What is the settelement time of the PURCHASE of an options contract?
T+1
What is the settlement date of the exercision of an option?
T+2
When does the options market close?
4pm ET
Till what time of day do options holders have to exercise their contract?
530pm ET
What is it called when an investor establishes an options position?
An Opening Transaction
What is it called when investors open LONG options positions?
Opening Purchases
What is it called when investors open short options positions?
Opening Sales
What is a closing sale?
When an investor sells their options contract to another investor for the current premium
What is a closing purchase?
When the Seller (shorter) of the option sells the obligation to another investor
What are the two components that influence market demand of an options contract?
- Intrinsic value
- Time value
What is the equation for an option premium?
intrinsic value + time value
What does time value represent?
The amount of time left until an option expires
How is time related to value of an option?
The longer the time until expiration, the more valuable an option
Calls In and Out of the Money rule
- In the money when market falls
- Out of the money when market falls
Put In and Out of the Money rule
- In the money when market falls
- Out of money when market rises
What is Call Up?
Intrinsic value when the market price above the strike price
What is Put Down?
Intrinsic value when market price is at or above the strike price
What time option is worth more, one week or 9 month?
9 Months
What is an American style option?
Allows for exercise at any time
What is a european style option?
Allows only exercise to occur at expiration
What type of options are american style options?
Stock options
What type of security are european style options?
Index options
Until when can european style be traded?
Up until and even on experation date
Define credit spread
when the premium you receive from selling the put is higher than the premium you pay from buying the put
What is the break even equation for long calls?
Strike + premium
What is the max gain and max loss for long calls?
MG = unlimited
ML = Premium
Maximum gain and loss for short calls
MG = premium
ML = unlimited
What 4 things can cover a short call?
- Long shares
- Long call
- Rights or warrants
- Convertible securities
What does the RUT track?
2000 small cap US traded company
What does VIX track?
volatility in the market?
Are most index options american style or european and what does that mean?
European, can only be exercised at expiration
What is the one exception of index options that don’t trade european stylle, but american?
The OEX (S&P 100
What is delivered in an index option when somethign is exercised?
Cah
What is the settlement time for stock option indexes?
T+1 cash settlement
Define systematic risk
Risk that applies to a large segment or entire market
What type of risk can you not diversify out of?
market
