Options Flashcards
Covered put
◾️The sale of a put against against a short stock position
◾️generates income, but limits the potential gains on the short of it declines and the put is exercised
◾️potential loss is unlimited since the stocks value could rise an infinite amount
For sophisticated investor who can afford potential loss resulting from rising value of the stock
Covered call
◾️A call sold against a long stock position
◾️generates income (the premium) and lowers the cost of the stock by the premium received
◾️upside potential is limited (if the call is exercised), while the downside risk is substantial
Investor seeking conservative income generating income strategy with risk exposure that is less then holding the stock without the option ( due to premium recorded)
Protective put
◾️A put purchased on a long stock position
◾️used to significantly protect (hedge) the downside rise of stock
◾️if the stock falls in value, the option position will gain value
Investors seeking to limit a short-term loss on the stock position while still participating in potential gains (gain on stock is reduced by premium paid)
Protective call
◾️A call purchased to hedge a short stock position
◾️used to significantly protect (hedge) the upside risk of the stock position
◾️if the stock rises in value, the option position will gain value
-investors seeking to limit a short-term loss on the short stock position, while still participating in potential gains (downside gain is minimized by premium paid)
Credit spread
◾️the sale and purchase of the same type of option on the same stock
◾️the premium received is greater than the premium paid (creating net debit)
◾️the net premium is the sellers maximum gain, while the maximum loss is the difference in the strike price minus the net premium (gain and loss are limited )
-investors seeking to generate short term income with limited risk; greatest profit realized if options expire
Credit call spreads are bearish
Credit put spreads are bullish
Debit spread
◾️the sale and purchase of the same type of option on the same stock
◾️the premium paid is greater than the premium received ( creating a net debit )
◾️ the net premium is the buyers maximum loss, while the maximum gain is the difference in the strike price minus the net premium (gain and losses are limited)
- investors seeking to speculate on small, short term price movements
Debit call spreads are bullish
Debit put spreads are bearish
Long options (buying calls or puts)
◾️allows investor to speculate on the Price movement of a stock without the capital outlay of buying the shares out right
◾️Unlike stock purchases, options are short term and may expire worthless
- Investors speculate on short term price fluctuations
Long calls for bullish speculation
Long puts for bearish speculation
Short options (selling calls or puts)
◾️Options seller accepts potential future obligation in exchange for premium income
◾️Income is limited to the premium if the option expires worthless
◾️Potential future loss may be substantial or even unlimited
-Sophisticated investors willing to except a substantial risk in exchange for premium and come
Long straddle or long combination
◾️Buying both a call and put it on the same stock to speculate on price volatility
-Straddle equals same stock expiration and strike price
- Combination equals same stock with different expirations and/or strike prices
◾️Loss of combine premiums occurs if price remains stable
- For investors seeking to speculate on short term price volatility; neither bullish nor bearish
Short straddle or short combination
◾️selling both a call and a put on the same stock to generate income of the combined premiums
-Straddle equals same stock expiration and strike price
- Combination equals same stock with different expirations and/or strike prices
◾️Potential future loss may be substantial or even unlimited
- For sophisticated investor speculating on short term price Stability and able to accept substantial risk
