Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Options Trading Course > Options Beginner Course > Flashcards

Options Beginner Course Flashcards

1
Q

What are the two types of options ?

A

Call Options and Put Options

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What exactly is a Call Option ?

A

Call options give a trader the right to buy an underlying asset , which can be a stock or etf or futures contract . i.e : AAPL

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Is a call options trader obliged to buy an asset?

A

No the trader has the right and not the obligation to buy the underlying asset. if they aren’t interested in owning shares of said asset , they don’t have to buy it.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Okay whats the difference between right and obligation?

A

a right can be defined as an entitlement to have or do something. An obligation can be defined as something that must be done because of a rule or law.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are put options ?

A

Put options give the trader the right to sell their underlying asset for a certain predetermined price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a call option trader hoping for ?

A

The trader of a call option usually hopes the price of an asset will increase as they can buy this asset at a discounted price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a put option trader hoping for ?

A

if the asset price decreases in value the put option trader would be able to sell the asset for more than it sold for on the open market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

buying options is also known as ?

A

Going Long

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

When you sell to open an option position this is referred to as ?

A

Going Short

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Are options sellers obliged to buy/sell their shares?

A

Yes , Option Sellers are obliged to buy or sell their position. option sellers don’t have the same directional assumption as option buyers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

A seller of a call option wants the underlying price to go A and a seller of a put option wants the price to go B

A

A) Down and B) Up

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Give an example of a call option trade:

A

Trader A buys a call option on the stock TSLA. Trader B sells the exact option to trader A. As trader A bought the call , they have the right to buy a certain amount of shares of TSLA at a predetermined price. If trader A chooses to exercise this right , Trader B won’t have a choice. They will have to sell shares of TSLA to trader A. Trader A wants the price of TSLA to go up so he can buy the shares at lower price. Trader B however wants TSLA price to go down or at least stay the same so that is wont be worth it for trader A to exercise their right.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Give an example of a put option trade :-

A

Trader C chooses to sell a put option on AMZN and Trader D buys this put option. Now trader D has the right to sell a present amount of AMZN’s shares as a certain price. Trader C does have the obligation to buy these shares of AMZN at a certain price if Trader D chooses to use his right to sell AMZN’s shares. Trader D would only exercise his right if the stock price would decrease as he otherwise would sell the shares for less than they are worth in the open market. Trader C on the other hand , hopes for an increase in AMZN’s price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Using the Call Option Trade give an example of a call contract :

A 
TSLA
Buy: 1 Call
TSLA: $680
Right to by @600
Exp: Jul 24
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Using the Put Option trade give an example of a put contract:

A 
AMZN
30 Put
Long
@480
Oct 31
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is a Strike Price?

A

When buying or selling an option you’ll have to choose a price to sell/buy the underlying asset for. For calls , the strike price is where the asset can be bought by the trader. For puts , the strike price is the price at which the asset can be sold.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Give an example of a strike price :

A

Lets say you buy a call on GME. when buying that call option , GME is trading at $100. you choose the strike price of $105. A strike price means you as a call option trader have the right to buy 100 shares of GME at $105 . obviously this is not worth it if GME’s price stays at $100 as $105 is higher price. but if GME’s price rises to say $120 it would be worth it as you could buy 100 shares of GME for $105 per share instead of $120.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How much shares does 1 standard options contract control ?

A

100 shares of the underlying asset.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

when a call strike price is lower than the asset , the option is considered?

A

In The Money (ITM)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

when a call strike price is greater than the asset , the options is considered?

A

On The Money (OTM)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

if a put option strike price is lower than the asset price , it is?

A

On The Money (OTM)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

if the put option strike price is greater than the asset price , the option is?

A

In The Money (ITM)

23
Q

if the strike price of an option is close to the assets price , the option is?

A

At The Money (ATM)

24
Q

What is one main difference between options and other asset classes ?

A

Options have expiration dates.

25
Q

Whats an example of a short term option and long term option?

A

Short - hour , day , week

Long - Month , quarter , year

26
Q

Can you sell/buy an option before its expiration date?

A

Yes buyer or seller can do so before expiration.

27
Q

What is an American Option ?

A

An American option is an option that allows traders to exercise the option right at any time before and including the day of expiration.

28
Q

What is a European Option ?

A

European options can only be exercised on the day of expiration.

29
Q

Do American and European Options dictate location ?

A

No , these styles have nothing to do with location. you can trade in European markets using American Options and trade in American markets using European options.

30
Q

What does this Contract mean?

1 Long Call @55 Jul 10

A

The 1 stands for the number of contracts. Long means this option is bought . Call is the type of option. @55 is the strike price. jul 10 is its expiration date. buying one contract of this option gives the trader the right to buy 100 shares of the asset @$55 before July 10.

31
Q

What does this contract mean ?

3 Long Put @460 Apr 20 ($AMC)

A

this means you are buying 3 contracts of this put option , giving the trader the right to sell 300 shares of $AMC @$460 before April 20th

32
Q

What does this contract mean ?

10 Short Put @$110 Sep 21 (PLTR)

A

You are selling 10 contracts of this put option , this could lead to the obligation to buy 1000 shares of PLTR for $110. The seller of this option has to buy these shares for that price if the buyer of that option chooses to exercise his option.

33
Q

What does this contract mean ?

1 Short Call @$55 Jul 20 (MVIS)

A

selling 1 contract of this call option , potentially gives the seller the obligation to sell 100 shares of MVIS at 55. this depends on what the buyer of this option does. if he exercises his option , the seller will have to sell the shares.

34
Q

What is an options chain ?

A

an options chain is a listing of all available options contracts for the given asset , it shows puts , calls , their expiration , strike price and volume.

35
Q

what is a positive with options as compared to stock trading ?

A

with options you have 1000s of ways to make money in whatever way the market moves. There are strategies for different market situations. where as stocks you can only buy or sell.

36
Q

what are the two types of risk strategies?

A

Defined risk and undefined risk strategies.

37
Q

what is a defined risk strategy?

A

defined risk strategies have a defined risk to them. this means that these strategies have unlimited risk mean you can’t lose more than a certain amount. most long strategies are defined risk strategies.

38
Q

what is a undefined risk strategy?

A

undefined risk strategies don’t have limited risk, therefore you don’t know how much you can lose when trading with them. these have defined profit potential an example would be a short call or put.

39
Q

what is another important aspect when trading options?

A

probability of profit

40
Q

what is a more preferable strategy and why?

A

undefined risk strategies have higher probability of profit than most defined risk strategies. therefore they are more preferable

41
Q

what are payoff diagrams?

A

Payoff diagrams are a visual display of changes to the option strategies profitability for changes in the assets price. they show how the profit or loss of a strategy looks at expiration.

42
Q

on a payoff diagram the x and y axis stands for?

A

The Y-axis stands for the profit and loss in the position and the x-axis displays the price of the asset.

43
Q

how does a long call show defined risk strategy?

A

if the price of a asset moves below its strike price, the max loss will be achieved. the loss in a long call won’t increase the further price falls in the asset. however the reward is unlimited for long calls. the further the stock price increases the greater the profit.

44
Q

are long puts defined or undefined , why?

A

long puts are defined risk and undefined profit strategies , they profit from decreases in asset price.

45
Q

explain a short call strategy

A

short calls have limited profit potential but unlimited risk. the more a asset price increases the greater the loss in the short call position becomes. but no matter how far the stock price decreases the profit in the position won’t increase after a certain point.

46
Q

explain a short put strategy

A

short puts work like short calls but in reverse. short puts profit from an increase in the asset and the position loses value from decline in the assets price.

47
Q

what is implied volatility?

A

implied volatility is a metric used to capture the markets view of the likelihood of changes in the given asset price. investors can use this to project future moves and supply and demand “buy the dip”

48
Q

is implied volatility constant?

A

no, implied volatility isn’t constant.

49
Q

when is buying options more popular?

A

buying options is popular during times of low volatility , it gives traders the possibility to profit from increases in implied volatility the expression “buy low , sell high”

50
Q

is implied volatility derived from option prices true or false?

A

true.

51
Q

when people expect bigger price swings what happens?

A

the demand for options increase , the option price increases.

52
Q

how can we calculate implied volatility ?

A

using the black scholes model

53
Q

explain the black-scholes model

A

its a mathematical formula that calculates the markets. its used to model options prices.

Options Trading Course (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions