OPTIONS Flashcards

1
Q

call options

A

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

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2
Q

put option

A

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

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3
Q

the writer

A

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

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4
Q

the holder

A

party with the long position (the buyer)

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5
Q

long position summary

A

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

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6
Q

short position summary

A

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.

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7
Q

price of a call option at time t

A

= max {spot price - strike ; 0}p

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8
Q

price of a put option at time t

A

= max {X-St;0}

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9
Q

CALL: at the money

A

spot = strike

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10
Q

CALL: in the money

A

spot > strike

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11
Q

CALL: out of the money

A

spot < strike

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12
Q

PUT: at the money

A

spot = strike

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13
Q

PUT: in the money

A

spot < strike

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14
Q

PUT; out of the money

A

spot > strike

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15
Q

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

A

see ppt

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16
Q

covered call

A

write a call whilst owning the underlying

17
Q

protective put

A

buying a put combined with owning the underlying

18
Q

bull

A

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

19
Q

bear

A

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

20
Q

butterflY

A

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

21
Q

straddle

A

buy a call and put with the same strikes

22
Q

strangle

A

buy a call and a put with differentstrikes

23
Q

STRIP

A

Buy one call and two puts with the same strike

24
Q

STRAP

A

buy two calls and a put with the same strike

25
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
26
PUT =
CALL + BOND - STOCK
27
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
28
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
29
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