Options Flashcards
If a customer is long 10 call options with a delta of .60, which of the following would neutralize this position?
sell 6 futures
buy 30 put options with delta .3
Buy 60 futures
sell 30 put options with delta of .3
In order to neutralize an option position which is 60% as volatile as the underlying contract (delta = .60), it is necessary to use 60% as many futures contracts (10 option contracts x 60% = 6 futures contracts). To neutralize long calls it is necessary to short the futures, therefore sell 6 futures contracts. C and D wouldnt work because you get long delta instead of short
What is a Synthetic Short Call?
Short put and short futures/stock
What are synthetic positions designed to do?
To give an investor the same profit and loss potential as buying or selling the option.
What are the 6 basic types of Synthetic positions?
1) Synthetic long stocks
2) Synthetic short Stocks
3) Synthetic Long call
4) Synthetic short call
5) Synthetic long puts
6) Synthetic short puts
What is a Synthetic Long Stock
Long Call + Short Put
What is a Synthetic Short Stock
Short call + Long Put
What is a Synthetic Long Call
Long put + long stock/futures
What is a Synthetic Long Put
Long Call + short stock/futures
What is a Synthetic Short Put
Short Call + Long stock/futures
T-Bill options are quoted in ______. And each ____ is worth $____
Basis points,
Bp
$25
A customer sells a T-bill call at 1.50. The dollar amount of the premium he receives is:
T-bill options are quoted in Bps. A quote on a tbill of 1.50 represents 150bps. if each bp is worth $25 the premium would be $3,750
(150x25x3750)
Explain a butterfly Spread
A butterfly spread is created using call options that have three different strike prices.
(1) long one contract at the lower strike price
(2) Short two contracts at the middle strike price.
(3) Long one contract at the higher strike price
Remember the 1-2-1 construction.
what is intrinsic Value?
The amount by which the option is ITM.
A speculator has purchased a call and a put on the same underlying futures contract. This is called a:
Long straddle
What needs to be included on commodity options confirmation statement?
1) Customer account ID number
2) A separate listing of the amount of the premium and all other commissions
3) The options series
4) the expiration date
What is the equation to determine the number of options contracts needed to hedge futures (assuming Delta mismatch)?
Ex: A farmer needs 50 futures contracts to hedge this year’s crops. To hedge, the farmer wants to use puts, instead of futures contracts. If the puts have a delta of 40% (.40), how many put contracts are needed to effectively hedge?
Divide the number of required futures by the options delta.
This farmer will need 125 put options (50 futures contracts/.40 delta). Notice that if the delta was smaller, the farmer would need even more puts and, if the delta was larger, fewer puts would be needed.
If a customer is long 10 call options with a delta of .40, which of the following would neutralize this position?
Sell 4 futures contracts
In order to neutralize an option position which is 40% as volatile as the underlying contract (delta = .40), it is necessary to use 40% as many futures contracts (10 option contracts x 40% = 4 futures contracts). To neutralize long calls it is necessary to short the futures, therefore sell 4 futures contracts.
Buyer of an option pays a premium, aka a____
Debit. and right to buy or sell futers
A seller of an option receivers a premium aka a ____
credit
When are Calls in the money?
When the Market price is higher than the strike
When are puts in the money
When the Market price is lower than the strike
Intrinsic value is aka what?
the in the money amount?
Options Dont have intrinsic value if they are not ITM
Premium =
Intrinsic value + Time value
Intrinsic value is ONLY created if the options is what?
In the money
if out of the money the option has 0 intrinsic value
Time Value is what?
The portion of an options premium that exceeds its intrinsic value. If no IV then premium is all time value
Time value consists of time left until expiration and market volatility. The more volatility the more time value
Whats the breakeven on a Long call position
Strike + premium
Whats the max gain and max loss of a call buyer?
Max gain is unlimited
Max loss is premium
Whats the breakeven of a Short call
strike place + premium also
Whats max gain for seller call?
Premium
Whats max loss for a seller call
unlimited
What is the breakeven for a Long Put position
Strike price - Premium
Whats max gain on Long Put?
(Strike - premium) x contract size
Whats max loss on Long Put?
premium
The most a buyer of an options can lose on something is whta?
The Premium
Whats breakeven on Short Put
Strike price - premium
The break even for Calls is always ___.And break even for puts is always __
Strike + premium
Strike - Premium
WHats max gain on short put?
premium
Whats max loss for short put
(strike price - Premium) x contract size
Whats the difference between a straddle and a Combination?
A straddle has the same strike, and same expiration month
Anything diff about expiry or strike is a Combination
A common Combination is a what?
Strangle, which is when strike prices are different
What is a spread option position
Limit losses in exchange for limiting gains
Created with the sale AND purchase of 2 options of same class but diff series
class- same type on same futures contract (buy/sell gold calls, corn puts)
series - options of same class, same expiration and same strike
can be bullish or bearish. and will be debit or credit
Vertical (price or dollar) Spread
Buying/selling and difference is strike
Buying gold 500 call
Selling gold 510 call
Horizontal Spread (calendar)
buying/selling and difference is Expiry month
Buy Dec silver 1 call
Sell Aug Silver 1 call
Diagonal Spread
When expiry month and strike different
Whats the diff between an combination and a spread
A Spread = always a buy and a sell and either both calls or both puts. Diff with be strikes, expiry or both
A combination = buying 2 options or selling 2 options but 1 call and 1 put
If you have a call spread. how can you tell if the strategy is bullish or bearish?
The option with the higher premium is always the dominant strategy
Whenever you have a debit spread (paying premium) you hope it widens or narrows?
widens. Bc when you put on a debit spread your buying the more expensive options. So you hope it goes up more.
WHats the breakeven in a call spread?
The breakeven point is the difference between the premiums, added to the strike of the dominate leg.
Add net premium to lower strike price
Whats the Max gain of a call spread?
The Difference between strikes minus the difference between premiums
Max loss on call spread is what?
Net premium
Do you want a credit spread to narrow or widen?
narrow
What is the Breakeven for a Put pread?
Higher premium - lower premium
Rule of thumb for puts is the higher the strike price the _____
premium
Your Net premium will always be your max gain or max loss. It depends on what?
The other one will always be what?
Depends on if your premium was a credit or debit. If premium was a credit, then premium is max gain. if premium was a debit, then premium max loss
The other one will be the difference of the strikes minus the difference of the premium
Delta is what?
Chnage in option premium compared to futures price. Change in option premium will always be a percentage of futures.
Number of Options to Hedge =
Number of futures / Options Delta
Synthetic
Buying calls, buying futures and selling puts
