Options Flashcards
Reading an Option
- Buying or Selling
- Contract Size (one option = 100 shares of underlying stock)
- Name of the stock
- Expiration month for the option
- Strike price
- They type of Option
- The premium
Options Expiration
- Initial expiration is typically 9 mo.
- Options expire at 4 p.m. EST (3 p.m. CST) on the third Friday of the expiration month.
Call Options
A call option gives the holder (owner) the right to buy 100 shares of a security at a fixed price and the seller the obligation to sell the stock at the fixed price.
Owners of call options want price to rise.
Sellers of options want price to drop.
The holder of a put option has the right to sell 100 shares of a security at a fixed price, and the writer (seller) of a put option has the obligation to buy the stock if exercised.
Buyers want stock to decrease
Seller want stock to increase
Option - “is in the money”
exercising the option lets investors sell a security for more than its current market value or purchase it for less — a pretty good deal.
Don’t take the cost of the option (the premium) into consideration when determining whether an option is in-the-money or out-of-the-money. Having an option that’s in-the-money is not the same as making a profit.
Intrinsic Value
The intrinsic value of an option is the amount that the option is in-the-money
Options - “out of the money”
exercising the option means investors can’t get the best prices; they’d have to buy the security for more than its market value or sell it for less.
Don’t exercise
Options - “at the money”
When the strike price is the same as the market price, the option is at-the-money; this is true whether the option is a call or a put.
Premium of an Option
The premium of an option is the amount that the purchaser pays for the option. The premium may increase or decrease depending on whether an option goes in- or out-of-the-money, gets closer to expiration, and so on. The premium is made up of many different factors
Calls Same
Add the Strike Price to the Premium to calculate the Break Even Point
Puts Switch
Place the Premium and the Strike Price on opposite sides.
Breakeven Point
Always the same for buyers and sellers
Opening Purchase
Opening purchase: An opening purchase occurs when an investor first buys a call or a put.
Opening Sale
Opening sale: An opening sale is when an investor first sells a call or a put.
Closing Purchase
A closing purchase occurs when an investor buys herself out of a previous option position that she sold.
Closing Sale
A closing sale occurs when an investor sells herself out of a previous option position that she purchased.
Options Clearing Corporation (OCC)
The Options Clearing Corporation (OCC) is the issuer and guarantor of all listed options. The OCC decides which options will trade and their strike prices. In addition, when an investor decides to exercise her option, it’s the OCC that randomly decides which firm on the other end will be responsible for fulfilling the terms of the option.
Options Risk Disclosure Statement
all investors must receive an options risk disclosure document (ODD or sometimes called an options disclosure document) before their first options transaction.
Registered Options Principal
Because of the extra risk of investing in options, all new accounts and option order tickets must be approved and signed by a registered options principal (ROP), which is a manager with a Series 4 license. The registered options principal determines the amount of risk that each investor can take.
Options Account Agreement (OAA)
Within 15 days after approval of the account by an ROP, the customer must sign and return an options account agreement (OAA, sometimes just called an options agreement). Basically, the OAA just states that the customer has read the ODD, understands the risk associated with trading options, and will abide by the rules and regulations regarding options trading.
Covered Position - Options Selling
The seller of a call option is considered covered if he owns the underlying security or owns an option on the same security with the same or longer expiration that will be in-the-money first.
Uncovered (Naked) - Options Selling
uncovered (naked) position is when the seller owns neither the underlying stock nor an option on the same security that will be in-the-money first with an equal or longer expiration date.
Last Trade
The last time an investor can trade an option is 4:00 p.m. EST on the business day of expiration.
Last Excercise
The last time an investor can exercise an option is 5:30 p.m. EST on the business day of expiration. If an option is in-the-money by at least 1 point at expiration, it will be automatically exercised. A vast majority of options (all equity [single-stock] and exchange-traded fund options) can be exercised any time up till expiration — this is known as American style.
Option Expiration
Options expire at 11:59 p.m. EST on the third Friday of the expiration month.
Option Exercised
Stock trades settle in two business days, so exercises of options settle in two business days. However, trades of options settle in one business day.
Aggregate Exercise Price
The exercise (strike) price of an option multiplied by the number of units (usually shares) of the underlying security covered by the option contract (usually 100 shares).
Clearing Member
A FINRA member that has been admitted to membership in the OCC (Options Clearing Corporation).
Closing Sale Transaction
An option transaction in which the seller wants to reduce or eliminate a long position.
Conventional Index Option
An option that overlies a basket (nine or more equity securities) or index of securities providing that no one security comprises more than 30 percent of the basket or index.
Conventional Option
(A) Any option contract not issued or subject to issuance by the OCC, or (B) an OCC-cleared OTC option.
Delta Neutral
An equity options position that has been fully hedged. For example, owning 100 shares of ABC stock and owning an at-the-money put on ABC stock. Basically, offsetting long and short positions.
Net Delta
The number of shares that must be maintained (either long or short) to offset the risk the investor is facing having an equity option position.
Opening Writing (opening sale)Transaction
The initial sale of an option in which the seller receives the premium paid.
Outstanding
An option contract that has been neither closed (closing sale) nor exercised, and has not reached the expiration date.
Series of Options
All option contracts that are of the same class, same expiration date, and same exercise price, and cover the same number of units of the underlying security or index.
Type of Option
Put, or Call
