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Inv. Objectives & Suitable Inv. > Options, Characteristics, Suitability > Flashcards

Options, Characteristics, Suitability Flashcards

1
Q

What do long options allow investors to do?

A

Speculate on the price movement of a stock without the capital outlay of buying the shares outright

Long options include buying calls or puts.

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2
Q

How do options differ from stock purchases?

A

Options are short-term and may expire worthless

This contrasts with stock purchases, which represent ownership in a company.

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3
Q

What is a long call used for?

A

Bullish speculation

Investors anticipate that the stock price will rise.

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4
Q

What is a long put used for?

A

Bearish speculation

Investors anticipate that the stock price will fall.

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5
Q

Who are long options unsuitable for?

A

Investors seeking income or those who cannot afford a total loss of capital

Long options involve significant risk.

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6
Q

Fill in the blank: Long calls are for _______ speculation.

A

bullish

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7
Q

Fill in the blank: Long puts are for _______ speculation.

A

bearish

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8
Q

True or False: Long options can be a good strategy for long-term investing.

A

False

Options are short-term instruments.

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9
Q

What is a risk associated with long options?

A

They may expire worthless

This leads to a total loss of the investment.

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10
Q

What do option sellers accept in exchange for premium income?

A

Potential future obligation

This refers to the commitment to fulfill the terms of the option if it is exercised by the buyer.

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11
Q

How is income limited for option sellers?

A

To the premium if the option expires worthless

This means that the maximum profit is the premium received from selling the option.

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12
Q

What is the potential future loss for option sellers?

A

Substantial, or even unlimited

This indicates that if the market moves against the position, losses can exceed the initial premium received.

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13
Q

Who is suitable for selling options?

A

Sophisticated investors willing to accept substantial risk

These investors understand the complexities and risks associated with options trading.

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14
Q

Who is unsuitable for selling options?

A

Investors who cannot assume substantial risk

Such investors may not have the financial capacity to absorb potential losses.

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15
Q

What is a Long Straddle?

A

Buying both a call and a put on the same stock to speculate on price volatility

A Long Straddle involves two options: a call and a put with the same expiration and strike price.

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16
Q

What is a Long Combination?

A

Buying both a call and a put on the same stock, but with different expirations and/or strike prices

A Long Combination allows for more flexibility in managing different time frames or price levels.

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17
Q

What happens to the premiums in a Long Straddle if the price remains stable?

A

Loss of combined premiums occurs

This means the investor may lose the money spent on the options if the stock price does not move significantly.

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18
Q

Who is a Long Straddle suitable for?

A

Investors seeking to speculate on short-term price volatility; neither bullish nor bearish

This strategy is appropriate for those who anticipate significant price movement but are uncertain about the direction.

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19
Q

Who is a Long Straddle unsuitable for?

A

Investors seeking income or those who cannot afford loss of capital

This strategy carries the risk of losing the entire investment in premiums if the market does not move.

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20
Q

What are the key components of a Straddle?

A

Same stock, expiration, and strike price

The Straddle strategy is defined by these components to create a balanced risk-reward scenario.

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21
Q

What does a Long Straddle speculate on?

A

Price volatility

Investors expect the stock price to move significantly in either direction.

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22
Q

What is a Short Straddle?

A

Selling both a call and a put on the same stock to generate income of the combined premiums

A straddle involves options with the same stock, expiration, and strikes.

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23
Q

What is a Short Combination?

A

Selling both a call and a put on the same stock with different expirations and/or strikes

A combination differs from a straddle by having different expiration dates or strike prices.

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24
Q

What is the potential future loss of a Short Straddle or Short Combination?

A

Potential future loss may be substantial or even unlimited

This highlights the significant risk associated with these strategies.

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25
Q

Who is a Short Straddle or Short Combination suitable for?

A

Sophisticated investors speculating on short-term price stability who can accept substantial risk

This strategy is not for inexperienced investors.

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26
Q

Who is a Short Straddle or Short Combination unsuitable for?

A

Investors who cannot assume substantial risk

These strategies carry high risk, making them inappropriate for risk-averse individuals.

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27
Q

What is a debit spread?

A

The sale and purchase of the same type of option on the same stock where the premium paid is greater than the premium received

This creates a net debit.

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28
Q

What constitutes the maximum loss for a buyer in a debit spread?

A

The net premium paid

The net premium is the amount spent on the spread.

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29
Q

What is the maximum gain in a debit spread?

A

The difference in the strike prices minus the net premium

Gains and losses in debit spreads are limited.

30
Q

Who are debit spreads suitable for?

A

Investors seeking to speculate on small, short-term price movements

They are not suitable for those expecting large price movements.

31
Q

What is a debit call spread?

A

A type of debit spread that is bullish

This means it is used when an investor expects the price of the underlying stock to rise.

32
Q

What is a debit put spread?

A

A type of debit spread that is bearish

This means it is used when an investor expects the price of the underlying stock to fall.

33
Q

True or False: Debit spreads are suitable for investors seeking unlimited gains.

A

False

They are unsuitable for those expecting large price movements or seeking unlimited gains.

34
Q

What is a Credit Spread?

A

The sale and purchase of the same type of option on the same stock

35
Q

What is the net premium in a Credit Spread?

A

The premium received is greater than the premium paid, creating a net credit

36
Q

What is the seller’s maximum gain in a Credit Spread?

A

The net premium

37
Q

What is the maximum loss in a Credit Spread?

A

The difference in the strike prices minus the net premium

38
Q

Are gains and losses in Credit Spreads limited or unlimited?

39
Q

Who is suitable for Credit Spreads?

A

Investors seeking to generate short-term income with limited risk

40
Q

When is the greatest profit realized in a Credit Spread?

A

If options expire

41
Q

What type of market movement do Credit Call Spreads anticipate?

42
Q

What type of market movement do Credit Put Spreads anticipate?

43
Q

Are Credit Spreads suitable for investors expecting large price movement or seeking unlimited gains? True or False?

44
Q

What is a Protective Put?

A

A put purchased on a long stock position

45
Q

What is the primary purpose of a Protective Put?

A

To significantly protect (hedge) the downside risk of the stock

46
Q

What happens to the option position if the stock falls in value?

A

The option position will gain value

47
Q

Who is a Protective Put suitable for?

A

Investors seeking to limit a short term loss on the stock position while still participating in potential gains

48
Q

What is a disadvantage of a Protective Put?

A

Gain on stock is reduced by premium paid

49
Q

Is a Protective Put suitable for investors seeking to generate income?

50
Q

What is a Covered Call?

A

A call sold against a long stock position

51
Q

What does a Covered Call generate?

A

Income (the premium)

52
Q

How does a Covered Call affect the cost of the stock?

A

Lowers the cost of the stock by the premium received

53
Q

What is the upside potential of a Covered Call?

A

Limited (if the call is exercised)

54
Q

What is the downside risk associated with a Covered Call?

A

Still substantial

55
Q

Who is a Covered Call suitable for?

A

Investors seeking a conservative income generating strategy

56
Q

What is the risk exposure of a Covered Call compared to holding the stock without the option?

A

Less than holding the stock without the option

57
Q

Who is a Covered Call unsuitable for?

A

Investors who believe that the stock has significant upside potential or those who want protection

58
Q

Fill in the blank: A Covered Call is suitable for investors seeking a _______.

A

conservative income generating strategy

59
Q

True or False: The downside risk of a Covered Call is eliminated.

60
Q

What is a Protective Call?

A

A call purchased to hedge a short stock position

61
Q

What is the primary purpose of a Protective Call?

A

To significantly protect (hedge) the upside risk of the stock position

62
Q

What happens to the option position if the stock rises in value?

A

The option position will gain value

63
Q

Who is a Protective Call suitable for?

A

Investors seeking to limit a short term loss on the short stock position, while still participating in potential gains

64
Q

What minimizes the downside gain when using a Protective Call?

A

The premium paid

65
Q

Is a Protective Call suitable for investors seeking to generate income?

66
Q

What is a Covered Put?

A

The sale of a put against a short stock position

67
Q

What does a Covered Put generate?

68
Q

What does a Covered Put limit?

A

The potential gains on the short if it declines and the put is exercised

69
Q

What is the potential loss associated with a Covered Put?

A

Unlimited since the stock’s value could rise an infinite amount

70
Q

Who is a Covered Put suitable for?

A

Sophisticated investors who can afford the potential loss

71
Q

True or False: A Covered Put can result in unlimited potential gains.

72
Q

Fill in the blank: A Covered Put is suitable only for _______.

A

sophisticated investors

Inv. Objectives & Suitable Inv. (6 decks)

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