options Flashcards
2 parts to a options contract
buyer and seller
describe buyer of an options contract
- purchaser/holder
- long
- pays premium for the right to exercise contract
describe seller of an options contract
- seller/writer
- short
- receives premium for the obligation to sell if contract is exercised
1 contract of an equity options contract =
100 shares
1 premium of an equity options contract =
$100
what is the intrinsic value?
difference between strike price and current market value of stock
calculate intrinsic value:
xyz july 40 call, xyz stock trading @ 43
43 - 40 = 3
exercising american way
option contracts can be exercised anytime
exercising european way
option contracts can be exercised on last trading day only
when do option contracts expire?
expire in on the 3rd friday in the 9th month
describe LEAPS
longer maturity options contract
-expire in 30-39 months usually
describe same classes of options
they are the same type and same stock
-all ABC calls
describe same series of options
they are the same type, stock, strike price, and expiration
-all ABC sept. 30 calls
describe owners and sellers of calls
owners-pay premium for right to buy
sellers-receives premium for obligation to sell
market attitude for calls and puts in bullish markets
- buy calls
- sell puts
market attitude for calls and puts in bearish markets
- sells calls
- buy puts
cheat for premiums and strike prices when calculating calls and puts
- calls match (premium + strike price on same side of T-chart)
- puts cross (premium + strike price on opposite side of T-char)
describe a bullish long call position
be- strike price + premium
max gain- unlimited
max loss- premium
describe a bearish short call position
be- strike price + premium
max gain- premium
max loss- unlimited
what is a good way to increase income on portfolio?
write covered calls
what is time value?
the amount of an options premium that exceeds intrinsic value
formula for calculating time value
PIT
premium - intrinsic value = time value
what factors determine time value?
- amount of time remaining
- volatility of stock
describe owners and sellers of puts
- owner- pays premium for right to sell
- seller- receives premium for obligation to buy
describe a bearish long put position
be- strike price - premium
max gain- be to 0
max loss- premium
describe a bullish short put position
be- strike price - premium
max gain- premium
max loss- be to 0
what is the purposes of a hedge positions against stock?
for protection - buy
for income - sell
what kind of option position would hedge against a long stock position?
- buy put (most protection)
- sell call (make income on premium received)
buy a ____ to protect long stock position
put
buy a ____ to protect short stock position
call
definition of a straddle
buy a call and buy a put or sell a call and sell a put (same stock, same expiration, same XP)
what does buyer expect when buying a long straddle?
buyer expects volatility of the stock but direction is unknown
describe when a long straddle is profitable
when the price of stock is outside of BE points
max gain on a long straddle?
unlimited
describe when a short straddle is not profitable
when the price of stock is between BE points
max loss on a long straddle?
price of 2 premiums paid
describe when a short straddle is profitable
when the price of stock is inside of BE points
max gain on a short straddle?
price of 2 premiums received
describe when a short straddle is not profitbale
when the price of stock is outside of BE points
max loss on a short straddle?
unlimited
what does buyer expect when buying a short straddle?
used when little volatility is expected
definition of call spread
buy call and sell call
definition of put spread
buy put and sell put
describe a vertical spread
different strike prices (price, money)
describe a horizontal spread
different expiration only (calendar, time)
describe a diagonal spread
different strike price and expiration
max gain on credit spread
net credit
-is the difference in premiums
max loss on credit spreads
difference in strike prices - net credit
break even on call spreads
lower strike price + net premium
credit spreads are profitable if:
- difference in strike price narrows
- both options expire
net credit =
difference in premiums has more money coming in than out.
selling more than buying
net debit =
difference in premiums has more money going out than coming in.
(buying more than selling)
max gain on debit spreads
strike prices difference - net debit
max loss on credit spreads
net debit
-is the difference in premiums
break even on put spreads
higher strike price - net premium
debit spreads are profitable if:
- difference in premiums widens
- both options are exercised
which strike price is dominant in call spreads?
lower strike price is dominant
which strike price is dominant in put spreads?
higher strike price is dominant
what kind of spread?
b dec 50 call
s dec 45 call
45 dollars out, 50 dollar in = 5 dollar profit
credit, bearish call spread
call spreads are bearish if..
buy higher call, sell lower call
what kind of spread?
s dec 50 call
b dec 45 call
50 dollars in, 45 dollars out = 5 dollars out
debit, bullish call spread
call spreads are bullish if..
sell higher call, buy lower call
purpose of foreign currency options?
hedge change in value of foreign currencies versus US dollar
cheat for importers and exporters of options
EPIC
- exporters buy puts
- importers buy calls
tax rules for options when closing transactions
capital gain or loss when position is closed
tax rules for options when option contract expires
capital gain or loss when position expires
-gain if short, loss if long
tax rules for options when option contract is exercised
no gain or loss reported until stock position is closed
OCC
options clearing corporation
-options regulatory governing body
option disclosure statement
must be sent to customer at or before account approvel
when must options accounts be approved and by who before trades are allowed?
- must be approved before first trade date
- registered options principal must approve the account
purpose of options agreement and what does it contain?
covers brokering firm
- financial information
- investment experience
- disclosure statement understanding
how many days does customer have to sign and return option agreement?
within 15 days after account approval
when do option contracts settle?
t + 1 day
what exchange do options trade on?
Chicago Board Options Exchange
maximum number of contracts for equity positions?
250,000
all advertising and sales literature must be approved by?
registered options principal
describe advertising literature
- audience unknown
- must file with OCC 10 days before use
- no strategy recommendations
describe sales literature
- audience known
- no filing with OCC
- may recommend strategies
what are the 3 communication categories?
- retail
- correspondence
- institutional
what defines retail advertising?
25 or more of same material within 30 days
what defines correspondence advertising?
25 or less of same material within 30 days
what defines institutional advertising?
advertising to banks, etc.
