Options Flashcards
What is a put option?
The right to sell an asset at a predetermined price
What is a call option?
The right to buy an asset at a predetermined price
What does longing a call mean?
Buying the right not the obligation to buy the asset at the predetermined price
What does longing a put option mean?
Buying the right not the obligation to sell the asset at the predetermined price
What does shorting a call mean?
Selling the call option, obligating themselves to sell the asset at the predetermined price if the option is exercised
What does shorting a put option mean?
Selling the put option, obligating themselves to buy the asset at the predetermined price if the option is exercised
What are the two components of option value?
The time value and the intrinsic value
What is the intrinsic value of a put option?
Max(0, X-S) where S is the current price in the market and X is the exercise price
What is the intrinsic value of a call option?
Max(0, S-X) where S is the current price in the market and X is the exercise price
What is the time value of an option?
The value that the option takes due to the likelihood of asset price change from its current price up until the option expiry
Which variation of option is worth more, American or European?`
American > European
When can a European option be exercised?
Only on the expiration date
When can an American option be exercised?
Before and up until the expiration date
What correlation does a call option have with a change in exercise price and why?
Negative, if the exercise price is higher there is a lower chance that the price will exceed that price and thus subtract from the intrinsic value. If the price is lower there is a higher chance that the price will exceed the exercise price and thus add to the intrinsic value.
What correlation does a put option have with a change in exercise price and why?
Positive, if the exercise price is higher there is a higher change that the price will be below that price and thus add to the intrinsic value. If the price is lower there is a lower chance that the price will be below the exercise price and thus subtract from the intrinsic value.
What correlation does a call option have with a change in spot price and why?
Positive, if the spot price is higher there is a higher likelihood that it will exceed the exercise price and thus add to the intrinsic value. If the spot price is lower there is a lower chance that the price will exceeed the exercise price and thus subtract from the intrinsic value.
What correlation does a put option have with a change in spot price and why?
Negative, if the spot price is higher there is a lower chance that it will be below the exercise price and thus subtract to the intrinsic value. If the spot price is lower there is a higher chance that the price will be below the exercise price and thus add to the the intrinsic value.
What correlation does a call option have with a change in interest rates and why?
Positive, if the interest rates are higher, the value of current money paid to buy the asset at the expiry date (or before the expiry) is lower and thus adds to the intrinsic value. If the interest rates are lower, the value of current money paid to buy an asset at the expiry (or before the expiry) is higher and thus subtracts from the intrinsic value.
What correlation does a put option have with a change in interest rates and why?
Negative, if the interest rates are higher, the value of current money paid to sell the asset at the expiry date (or before the expiry) is lower and thus subtracts to the intrinsic value. If the interest rates are lower, the value of current money paid to sell an asset at the expiry (or before the expiry) is higher and thus adds to the intrinsic value.
What correlation does a call option have with dividends and why?
Negative. If dividends are paid out, the spot price will experience a drop meaning that it is less likely to exceed the exercise price and thus subtract from the intrinsic value. If dividends are not paid out, the sport price will remain the same meaning that it has a higher likelihood that it will exceed the price and thus adds to the intrinsic value.
What correlation does a put option have with dividends and why?
Positive. If dividends are paid out, the spot price will experience a drop meaning that it is more likely to be below the exercise price and thus adds to the intrinsic value. If dividends are not paid out, the sport price will remain the same meaning that it has a lower likelihood that it will be below the exercise price and thus subtracts from the intrinsic value.
What correlation does a call option have with volitility and why?
Positive. The more volitile the price of an asset is, the more likely that it will experience a price increase and will thus add to the time value of an option.
What correlation does a put option have with volitility and why?
Positive. The more volitile the price of an asset is, the more likely that it will experience a price decrease and will thus add to the time value of an option.
What correlation does a call option have with time to expiry and why?
Positive. The more time until expiry, the more time for a price increase to occur and will thus add to the time value of an option
What correlation does a put option have with time to expiry and why?
Positive. The more time until expiry, the more time for a price decrease to occur and will thus add to the time value of an option
