options Flashcards
perhaps the best known options pricing model
Black Scholes Model
The model’s formula is derived by multiplying the stock price by cumulative standard normal probability distribution function.
The Black Scholes Model
helps you determine the possible magnitude of future moves of underlying stock
Historical Volatility
what is implied by the current market prices and is used with theoretical models
Implied Volatility
It helps set the current market price of an existing option and helps options players assess the potential of a trade.
Implied Volatility
An option’s time value is also highly dependent on the volatility the market expects the stock to display up to expiration.
Volatility
Measures the sensitivity of the interest rate.
Rho
measures the impact on premium based on the time left for expiry
Theta
rate of change of premium on change in volatility
Vega
rate of change of delta itself
Gamma
measures the rate of change of options premium based on the directional movement of the underlying
Delta
Generally measure the sensitivity of the option price to various parameters that impact the value of an option.
Option Greeks
Displays the underlying stock price movements using a discrete time binomial lattice (tree framework)
Binomial Pricing Model
give the right in the hands of the buyer to sell the underlying security by a particular date for the strike
price, but he is not obligated to do so.
Put options
gives the option holder (buyer) the right to buy the underlying asset at a particular price which is fixed
(strike) for that particular time frame (expiration date).
Call Option
Is the money required to be paid by the option buyer to the option seller/writer. The premium is arrived at by the
negotiation between the taker and the writer of the option.
Premium
The ________ is the predetermined buying or selling price for the underlying shares if the option
is exercised.
Exercise Price
is the anchor price at which two parties (buyer and seller) agree to enter into an options agreement.
Strike Price
Options have a limited life span and expire on standard expiry days set by Exchange. The Expiry Day is the day
on which all unexercised options in a particular series expire and is the last day of trading for that particular series.
EXPIRY DATE
In options market an option contract size is standardized. The Contract Size is an important variable to
understand when entering into an options contract.
CONTRACT SIZE -
allows you to buy a given asset at a certain exercise price. The most valuable option will be the one that
allows you to acquire the asset at no cost, and the value of this option will be equal to the value of the underlying asset.
OPTION
