Options Flashcards
What are derivatives
securities that get their value from the price of other securities
What are they a powerful tool for
speculation and hedging
What does a call option do
gives us choice to buy an asset- at strike price on or before the expiration date
when should you exercise the option to buy
Exercise the option to buy the underlying asset if market value > strike price
What is a put option
gives the option to sell an asset- at strike price or before the expiration date
When should you exercise the put option
when strike price > market value
What is the purchase price of an option called
premium
What do seller of the option receive
premium income
What happens when holder exercises option
the option writer must make call or take put delivery on the asset
Positive money
call (strike price < asset price)
put (strike price > asset price)
Broke ass
call (strike price > asset price)
put (strike price < asset price)
When can options be taken in America
at any time before the expiration or maturity
When can options be taken in Europe
only at the point of expiration or maturity
Pros of Puts
protection against stock market declines and locks in a minimum portfolio value
cost of insurance is the premium
Pros of Calls
by putting a call above the premium it ensures a profit instead of risk
