OPTIONS Flashcards
call options
the right but not the obligation to buy a given quantity of an asset at a predetermined price (= strike price) before or on a given date
put option
the right but not the obligation to sell a given quantity of an asset at a predetermined price ( = strike price) before or on a given date
the writer
the counterparty to the buyer, the party with the short position, has an obligation to sell (buy) the underlying asset if the call(put) option holder choses to exercise the option - as compensation for the obligatytion at t = 0 recieves a non refundable premium
the holder
party with the long position (the buyer)
long position summary
Long Call Option:
Buyer’s Right: Buy the underlying asset
Profit: Unlimited
Loss: Limited to the premium paid
Long Put Option:
Buyer’s Right: Sell the underlying asset
Profit: Limited to the strike price minus the premium paid
Loss: Limited to the premium paid
short position summary
Short Call Option:
When you sell a call option, you are obligated to sell the underlying asset at the strike price if the option is exercised by the buyer.
Profit: The maximum profit is the premium received from selling the call option. The profit decreases as the price of the underlying asset rises above the strike price.
Loss: Unlimited. If the price of the underlying asset rises significantly above the strike price, the losses can be substantial.
Short Put Option:
When you sell a put option, you are obligated to buy the underlying asset at the strike price if the option is exercised by the buyer.
Profit: The maximum profit is the premium received from selling the put option. The profit decreases as the price of the underlying asset falls below the strike price.
Loss: Limited to the strike price minus the premium received. If the price of the underlying asset falls to zero, the maximum loss is the strike price.
price of a call option at time t
= max {spot price - strike ; 0}p
price of a put option at time t
= max {X-St;0}
CALL: at the money
spot = strike
CALL: in the money
spot > strike
CALL: out of the money
spot < strike
PUT: at the money
spot = strike
PUT: in the money
spot < strike
PUT; out of the money
spot > strike
covered call, protective puts, bulls, bears, butterflies, straddles and strangles, strips and straps
see ppt
covered call
write a call whilst owning the underlying
protective put
buying a put combined with owning the underlying
bull
spread (combination of two or more call or put options on the same underlying with diff strikes and expirations)
buy a call with strike X1
write X2 with X1< X2
bear
buy a call with X2 and write one with X1<X2
butterflY
Buy a call with X1 biy another with much higher X3 and write one with X2
X1<X2<X3
straddle
buy a call and put with the same strikes
strangle
buy a call and a put with differentstrikes
STRIP
Buy one call and two puts with the same strike
STRAP
buy two calls and a put with the same strike
put - call parity
price of a call + PV(X) = S0 + price of a put
or
P0 = C0 + e^-rt * X - S0
r = RISK FREE RATE
T = TIME TO EXPIRy
PUT =
CALL + BOND - STOCK
taking advantage when put is higher than expected put
TODAY - long the put, buy the stock, borrow to repay £56 in one year, write a call
call
call down and strike up
call up as underlying down
call up as volatility up
call up as time to maturity up
call up as interest rates up
put
put up as strike up
put up as underlying up
put up as volatility up
put (depends) as time to maturity increases
put down as interest rates up
