Options

Question 0

Option contract term adjustments:

Answer 0

of shares in contract or # of option contracts will change if stock changes:

Stock dividends
Stock splits
Right distributions

Question 1

Long calls and short puts = same side of the market (bullish)

Answer 1

Long puts and short calls = same side of the market (bearish)

Question 2

Ex dividend(options)

Answer 2

Exercise date of the option determines who will be owner of the stock:

Question 3

If call excised notice is filed with OCC prior to ex date buyer long will receive dividend if own stock

Answer 3

If put excised notice is filed with OCC prior to ex date, assigned put writer will receive dividend, because they own the stock

Question 4

Intrinsic value

Answer 4

Of an option is in-the-money amount of the option.( the more the option is in the money the HIGHER THE PREMIUM ). Difference bt stocks mkt px and options price, if exercised would be profitable to holder of long position

Question 5

Time value

Answer 5

Is the amount of premium which exceeds the intrinsic value. Options are referred to as “wasting assets” because their valid declines the closer you get to the expiration date.

Question 6

Following would affect price of premium:

Answer 6

1. Market price of stock
2. Time until expiration of the option
3. Volatility of stock
4. Changes in interest rates

Question 7

Intrinsic and time value:

Buy 1 ABC May 50 Call @8, ABC @ 55

Answer 7

Intrinsic Value= 5 points

Time Value= 3 points

Question 8

Continued IV and TV

Answer 8

The premium value of an option will move dollar for dollar with the price of the stock when option is “at the money” or “in the money”

Question 9

Spread

Answer 9

Basic option spread is “long & short” position in 2 call contracts or 2 put contracts on same stock. But w/ different expiration months and/or dif strike prices

Question 10

Use of Spreads:

Answer 10

Primary use of spreads is to limit risk, limits risk, limits profit potential, feel sure about direction of the market.
Not expected exercising. Make or lose money on premiums.

Question 11

Calendar/horizontal/time spreads:

Answer 11

Different expiration months

Long 1 ABC May 50 Call
Short 1 ABC Aug 50 Call

Question 12

Vertical Spread

Answer 12

Spread has 2 different strike prices, are either bullish or bearish

Question 13

Vertical Bull Spread:

Answer 13

Buy option with LOWER strike price and sell option with the HIGHER strike price.

Question 14

Vertical Bear Spread:

Answer 14

Buy option with HIGHER strike price and sell option with the LOWER strike price.

Question 15

Diagonal Spread:

Answer 15

Different exercise prices and different expiration months

Question 16

The Spread is the difference in premiums

Answer 16

When an investor puts a spread results in a Net Credit(+) or Net Debit(-)

Buy (-)
Sell (+)

Question 17

NOTE: for Debit Spreads

Answer 17

We do not want option to expire

To profit we always want debit spreads to “widen” by more than the “original debit”

Question 18

Summary of Debit Spread:

Answer 18

Maximum loss potential is the “net debit in premiums”
Max profit, different bt 2 strike prices less the net debit
Debit spreads must widen by more than the net debit

Question 19

Credit spread:

Answer 19

Max profit potential is the net credit in the premiums, if option expires.
Max loss potential is dif bt 2 strike prices less the credit in premiums
Credit spreads must narrow

Question 20

Straddle:

Answer 20

Opposite of spreads, it is an equal # of puts and calls, both long or both short on same stock with same expiration month and same expiration price

Question 21

2 types of straddles:

Answer 21

Long = buy call and put

Short = sell call and put

Question 22

Long Straddle:

Answer 22

= long call and long put

Investor anticipates major move in price but unsure of direction move.
If stock price moves up of down could make $ by exercising one option position and let other expire.
If options expire, max loss potential is premiums paid

Question 23

Short straddle:

Answer 23

=short call and short put
Stock price remain NEUTRAL
Make $ from premiums received from sale of the put and call
Short call straddle to be UNCOVERED, could mean unlimited loss

Question 24

Combination

Answer 24

Straddle has different exercise prices and/or different expiration months.
Short combo remain neutral, make $ by premiums paid
Short call uncovered, unlimited loss

LONG COMBO, max loss pay premiums if let expire