Options and Recommendations (Suitability) Flashcards
Long Call
Choice to buy the stock
Short Call
Obligation to sell the stock (at STRIKE)
Long Put
Choice to sell the stock
Short Put
Obligation to buy the stock (at STRIKE)
Settlement for Options
T + 1
Resulting Stock Trade (settlement) after Options Settlement
T + 2
Premium [equation]
Intrinsic Value + Time Value
OCC
Options Clearing Corporation: The Issuer and Guarantor of all options contracts
Exercise Styles
American Style: Exercise at any time (common for equity options contracts)
European Style: Exercise on last trading date at expiration (common for non-equity options contracts)
Index Options Settlement
T + 1
Resulting Exercise of Index Options Settlement
T + 1
Opening Purchases
Used to establish/add to a long position
(remember: Purchase = Buy = LONG)
Opening Sales
Used to establish/add to a short position
(remember: Sale = Sell = SHORT)
Offsetting (to an Opening Purchase/Sale) / Closing Purchase or Sale
Closing Purchase is used to eliminate a short position
Closing Sale is used to elimiate a long position
(remember: OPPOSITE of Opening Purchase/Sale)
If a contract does not have Intrinsic Value, the option will…
Expire Worthless
If a contract has Intrinsic Value, the option will…
Be exercised
Position Limits apply to…
The same side of the market
Class
Stock + Type of option (call or put)
BUY SIDE of the market is also known as…
The Bullish Side: consists of Long Calls and Short Puts
SELL SIDE of the market is also known as…
The Bearish Side: consists of Short Calls and Long Puts
LEAPS
Long-term Equity Anticipation Securities: Technically 39 months, but 30 months in practice. LEAPS are the only contracts that may qualify for long-term option contracts
True or False: Longer term options contracts always have lesser premiums.
False
(remember: Longer = Better)
True or False: Yield-based Options have a direct relationship to interest rates
True
(remember: Yield always correlates to Interest Rates)
Strategy: Protective Put for Equity/Index Options
Gives the ability to participate in a big price increase, but not participate in a price decline
Strategy: Covered Call and Put Writing for Equity Options
Generate additional income and/or supplement dividend income
VIX
Volatility Index
For Advanced Options Strategies, you are either buying or selling…
Volatility
If you’re LONG CALL / SHORT PUT, you’re buying UPWARD VOLATILITY
If you’re LONG PUT / SHORT CALL, you’re buying DOWNWARD VOLATILITY
What is the max loss in a Long/Debit Spread?
Debit
Debit call spread is BULLISH / BEARISH
Bullish
Debit put spread is BULLISH / BEARISH
Bearish
What is the max gain in a Short/Credit Spread?
Premium
Credit call spread is BULLISH / BEARISH
Bearish
Credit put spread is BULLISH / BEARISH
Bullish
What are the important components of Straddles?
1) Identify the straddle (Long or Short)
2) Calculate the breakevens
3) Determine where the straddle is profitable (Short-Inside, Long-Outside; aka SILO)
4) When do you use a straddle?
What are the important components of Spreads?
1) Identify the spread (Long or Short)
2) Identify if the spread is Debit or Credit
3) Determine whether contracts want to Expire or Exercise
4) Determine if difference in premiums Narrow or Widen
5) Find MAX GAIN and MAX LOSS
6) Calculate the breakevens (Call: Add to Lower; aka CAL, Put: Subtract from Higher; aka PUSH)
7) Determine Bullish or Bearish (remember: Larger premium DOMINATES the position)
For Spreads, which identifiers always go together?
1) Credit, Expire, Narrow (CEN)
2) Debit, Exercise, Widen (DEW)
Naked/Uncovered Call
Agree to sell stock you don’t own
True or False: Naked/Uncovered Calls hold limited risk.
False: ALWAYS UNLIMITED RISK
True or False: Naked/Uncovered Puts hold limited risk.
True: Breakeven to 0
Call Breakevens [equation]
Strike + Premium
Put Breakevens [equation]
Strike - Premium
Stock + Options: Covered Call Breakeven [equation]
Stock Cost - Premium
Stock + Options: Protective Put Breakeven [equation]
Stock Cost + Premium
Straddle: Upside Breakeven [equation]
Strike + TOTAL Premiums
Straddle: Downside Breakeven [equation]
Strike - TOTAL Premiums
Spread: Call Breakeven [equation]
Lower Strike + NET Premium
(remember: Call = add to lower)
Spread: Put Breakeven [equation]
Higher Strike - NET Premium
(remember: Put = subtract from higher)
Options contracts can either be…
Traded, Exercised, or Expired
(remember: TEE)
What are the tax treatments for TEE?
Traded: ALL short term
Exercised: Follows Breakeven
(remember: Cost Basis = Breakeven)
Expired: ALL short term (exception of LEAP, which is long-term)
