OPTIONS

Question 1

call options

Answer 1

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

Question 2

put option

Answer 2

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

Question 3

the writer

Answer 3

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

Question 4

the holder

Answer 4

party with the long position (the buyer)

Question 5

long position summary

Answer 5

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

Question 6

short position summary

Answer 6

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.

Question 7

price of a call option at time t

Answer 7

= max {spot price - strike ; 0}p

Question 8

price of a put option at time t

Answer 8

= max {X-St;0}

Question 9

CALL: at the money

Answer 9

spot = strike

Question 10

CALL: in the money

Answer 10

spot > strike

Question 11

CALL: out of the money

Answer 11

spot < strike

Question 12

PUT: at the money

Answer 12

spot = strike

Question 13

PUT: in the money

Answer 13

spot < strike

Question 14

PUT; out of the money

Answer 14

spot > strike

Question 15

covered call, protective puts, bulls, bears, butterflies, straddles and strangles, strips and straps

Answer 15

see ppt

Question 16

covered call

Answer 16

write a call whilst owning the underlying

Question 17

protective put

Answer 17

buying a put combined with owning the underlying

Question 18

bull

Answer 18

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

Question 19

bear

Answer 19

buy a call with X2 and write one with X1<X2

Question 20

butterflY

Answer 20

Buy a call with X1 biy another with much higher X3 and write one with X2
X1<X2<X3

Question 21

straddle

Answer 21

buy a call and put with the same strikes

Question 22

strangle

Answer 22

buy a call and a put with differentstrikes

Question 23

STRIP

Answer 23

Buy one call and two puts with the same strike

Question 24

STRAP

Answer 24

buy two calls and a put with the same strike

Question 25

put - call parity

Answer 25

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

Question 26

PUT =

Answer 26

CALL + BOND - STOCK

Question 27

taking advantage when put is higher than expected put

Answer 27

TODAY - long the put, buy the stock, borrow to repay £56 in one year, write a call

Question 28

call

Answer 28

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

Question 29

put

Answer 29

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