Options/Equations/Memory Devices Flashcards
True or False: A 60 put with the market at 60 is at-the-money.
True
To offset an option sale, an investor would execute a ___________________.
Closing purchase
What is the primary use of VIX options?
To give individual investors the ability to trade market volatility
The maximum gain for an option seller is the ____________.
Premium received
Jim is short 1 MNO August 40 Put at 4.50. What is Jim’s breakeven point?
40 - 4.50 = 35.50 (strike price minus the premium or PUT DOWN)
Equity options have a contract size of _____ shares.
100 shares
An investor owns 1 ABC May 60 Call. If ABC announces a 3:2 split, what are the terms of the investor’s contract now?
1 ABC May 40 Call (150 sh. contract). Shares increase to 150 (100 x 3/2) and strike price decreases to $40 ($60 x 2/3).
An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan 50 put at 3. What are the breakeven points?
50 + 5 = 55 and 50 - 5 = 45. The combined premium of 5 is added to 50 (CALL UP) and subtracted from 50 (PUT DOWN).
Glenn owns 1 ABC May 60 Call. If ABC announces a 2:1 split, how would Glenn’s position change?
Glenn now has 2 ABC May 30 Calls (100 shares each). The overall contract value must remain $6,000.
An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. What is the investor’s breakeven point?
91 + 2 = 93 (cost of the stock + premium paid)
An investor holds 1 XYZ Jan 80 Put at 5. Later at expiration, if XYZ has held at 80, would there be a gain or a loss?
A loss of $500, since the option expires at-the-money
Given the same expiration months and no premiums, how is the more valuable option in a put spread identified?
The put option with the higher strike price is always more valuable.
An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. Is this a debit or credit spread?
Since the larger premium is on the sell leg, this is a credit spread, sold for a net premium of 7.
Jill buys 1 STC Nov 85 put. To create a debit put spread, Jill sells 1 STC Nov put with a strike price that is ______.
Jill buys 1 STC Nov 85 put. To create a debit put spread, Jill sells 1 STC Nov put with a strike price that is lower.
An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What is the investor’s breakeven point?
30 - 2 = 28 (cost of the stock - the premium received)
The maximum expiration for standard equity options is ____ months.
9 months
An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is the investor’s maximum gain?
$600. If BBO remains between 70 and 65, both options expire and the seller makes the $600 total premium.
An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. Is the investor bullish or bearish on ABC?
He is bullish. The dominant leg is the buy leg, which makes the investor the buyer of a call.
An investor holds 1 XYZ Jan 80 Put at 5. What is her maximum loss?
The premium of $500
Sandra buys 1 ABC Dec 70 Call at 4. Later ABC rises to 80 and Sandra liquidates the call for 11. What is the result?
A $700 gain. She originally paid 4, but received 11 on the sale, netting a $700 gain.
An investor writes 1 DEF May 55 Call at 6. What is the investor’s strategy?
Bearish
Long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. To profit, should the spread widen or narrow?
If the premium spread widens, the spread can be closed for more than $200. Remember, BUYER and WIDEN have 5 letters.
Which has unlimited risk? 1) Long stock + short call, 2) Short stock + long call, 3) Short stock + short put
Short Stock + Short Put
Jim is short 1 MNO Aug 40 Put at 4.50. Does Jim have a right or an obligation?
Obligation to buy at 40
Sandra buys 1 ABC Dec 70 Call at 4. Later at expiration, if ABC has fallen to 67, would Sandra have a gain or a loss?
A $400 loss of the premium.
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much intrinsic value does the option have?
$1.00 or 1 point
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much time value does the option have?
$2.00 or 2 points
Sandra buys 1 ABC Dec 70 Call at 4. What is Sandra’s maximum gain?
Unlimited
Buy 1 ABC Dec 70 Call at 4. When ABC rises to 80, the call is exercised and the stock is immediately sold. Result?
A $600 profit since the investor is bullish and the stock rose 6 points above the breakeven point of 74.
An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. What is the investor’s maximum loss?
The net premium of $400. Remember, buyers cannot lose more than the premium.
How is the premium for a world currency option calculated?
Contract size x the premium (with decimal moved appropriately)
An investor is long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. Is the investor bullish or bearish on DEF?
He is bearish. The dominant leg is the buy leg, which makes the investor the buyer of a put.
Sell 1 ABC May 65 put at 9 and buy 1 ABC May 50 put at 2. Is the spread a debit or credit? Is it bullish or bearish?
The larger premium is the sell leg, so it is a credit spread. The dominant leg is the sale of a put, so it is bullish.
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What’s the investor’s maximum loss?
Unlimited. The investor has no protection if the stock continues to rise above the 38 breakeven.
Identify the type of spread: An investor is long 1 MCD Jun 50 call and is short 1 MCD Sep 60 call.
A spread with different expirations and different strikes is a Diagonal spread.
An investor holds 1 XYZ January 80 Put at 5. What is her breakeven point?
80 - 5 = 75 (strike price minus premium or PUT DOWN)
An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar 40 call at 3. Is this a debit or credit spread?
Since the larger premium is on the sell leg, this is a credit spread, sold for a net premium of 4.
If asked to determine basis or sales proceeds on an exercised put, remember to ____________.
If asked to determine basis or sales proceeds on an exercised put, remember to PUT DOWN (strike price minus the premium)
An investor is long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. Is this a debit or credit spread?
Since the larger premium is on the buy leg, this is a debit spread, bought for a net premium of 2.
An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. What is the investor’s maximum loss?
$800. If the stock falls, the investor could lose starting from the breakeven of 88 down to 80.
Long 1 TNT Aug 50 call at 5 and short 1 TNT Aug 60 call at 2. Is the spread a debit or credit? Is it bullish or bearish?
The larger premium is on the buy leg, so it is a debit. The dominant leg is the purchase of a call, so it is bullish.
An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What is the investor’s strategy? (volatility or stability)
Volatility
There is an inverse relationship between the movement of a world currency and the _____________.
US dollar
With options, what terms are synonymous with buyer?
Owner, holder, long
An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. What is the investor’s breakeven point?
30 + 4 = 34 (always between strikes). For call spreads, the net premium is added to the lower strike (CALL UP).
When does volatility tend to increase?
When the market (S&P 500) drops abruptly
True or False: Option writers want contracts to expire at- or out-of-the-money.
True
An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is this position?
Short Combination
An investor buys an OEX May 475 call at 10. What is his maximum gain?
Unlimited
What is the settlement for spot trades?
T + 2
An investor owns 1 ABC May 60 Call. If ABC declares a 25% stock dividend, what is the investor’s new position?
1 ABC May 48 Call. The call is for 125 shares (100 x 25% = extra 25). Then, $6,000 (total value) ÷ 125 sh. = $48.
Define a series of options.
Define a series of options
All options with the same underlying interest, expiration month, strike price and type (e.g. ABC May 60 Call)
What is a covered call position?
The sale of a call (obligation to sell) against stock that is owned
If asked to determine basis or sales proceeds on an exercised call, remember to ____________.
Remember to CALL UP (strike price plus the premium).
What are two uses of index options?
1) speculate on market movement
2) hedge a portfolio
Jim is short 1 MNO Aug 40 Put at 4.50. If MNO rises to 44 at expiration, would Jim have a gain or a loss?
A gain of the $450 premium
A call option is in-the-money when the market price is ____________ the strike price.
Above
True or False: When adjusted for stock splits or stock dividends, an option’s overall contract value remains constant.
True
What is the tax result for a LEAP that was purchased at 6 and two years later sold at 12?
A long-term capital gain of $600. Remember, a gain on an asset held greater than one year is long-term.
An investor, believing interest rates will rise, could profit by taking what yield-based option position?
Buy yield-based calls or write yield-based puts
An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What is this position?
Long Combination
Sell 1 ABC Mar 30 call at 7 and buy 1 ABC Mar 40 call at 3. For profit, should the spread widen or narrow?
If the premium spread narrows, much of the $400 net premium is kept. Remember, SELLER and NARROW have 6 letters.
True or False: A 110 call with the market at 108 is out-of-the-money.
True
True or False: A combination contains either two calls or two puts.
True
True or False: A spread consists of both a call and a put.
False. A spread consists of either 2 calls OR 2 puts.
Is a combination a Spread or Straddle?
Straddle (1 Call and 1 Put with different XP OR Exp.)
An investor is long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. What is the investor’s maximum gain?
$300. If the stock falls, the investor could profit starting from the breakeven of 33 down to 30.
An investor holds 1 XYZ Jan 80 Put at 5. What is her maximum gain?
$7,500 (strike price minus premium)
For most world currency quotes, the decimal must be moved how many places to the left to convert to U.S. dollars?
Two places to the left
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investor’s maximum loss?
$800. If XYZ stays at 70, both options expire. Remember, buyers cannot lose more than the premium.
Long 1 XYZ Jan 80 Put at 5. Later XYZ falls to 68, and the put is liquidated at its then premium of 12.50. Result?
A $750 gain. The investor originally paid $500, but then received $1,250, netting a $750 gain.
An investor holds 1 XYZ Jan 80 Put at 5. What is the result if later XYZ falls to 65, and the put is exercised?
A profit of $1,000. The investor needed the stock down at 75 to breakeven, and the stock fell 10 points beyond 75.
If exercised against, the writer of an equity call option is obligated to _____ the underlying stock.
Sell
If the OCC examines position limits on ABC, what contracts are added on the bullish side of the market?
ABC long calls and ABC short puts
A put option is in-the-money when the market price is ____________ the strike price.
Below
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investor’s maximum gain?
Unlimited gain on the long call, $6,200 gain on the long put. Gains occur if the stock rises or falls dramatically.
Joe sells 1 ABC Oct 55 call. To create a debit call spread, Joe buys 1 ABC Oct call with a strike price that is ______.
Lower
Spreads consist of what 2 options?
2 Calls OR 2 Puts
Identify the spread: Sell 1 STC Sept 50 call and Purchase 1 STC June 50 call
This is a time, calendar, horizontal, or date spread.
A horizontal spread is synonymous with what 3 other terms?
1) Time spread
2) Calendar spread
3) Date spread
An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What are the breakeven points?
70 + 6 = 76 and 65 - 6 = 59. The combined premium of 6 is added to 70 (CALL UP) and subtracted from 65 (PUT DOWN).
Eric sold a 50 call at 6 and was later exercised against. Eric would have sales proceeds of how much?
$5,000 + $600 = $5,600 or 56 (strike price plus the premium)
An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan 50 put at 3. What is the investor’s maximum loss?
Unlimited loss on the short call, $4,500 loss on the short put. Losses occur if the stock rises or falls dramatically.
True or False: If an investor expects the U.S. dollar to strengthen, she could profit by buying U.S. dollar calls.
False. There are no U.S. dollar calls or puts issued; therefore, all answers must be based on a world currency.
Short 1 MNO Aug 40 Put at 4.50. MNO falls to 30, the put is exercised and the stock is immediately sold. Result?
A loss of $550. The breakeven is 35.50, but the stock fell 5.50 lower than 35.50.
Bill writes 1 DEF May 55 Call at 6. Later DEF rises to 70 and the call is exercised, what is Bill’s result?
$900 loss. The writer could afford the stock rising to 61(breakeven), but the stock rose 9 points higher than 61.
True or False: The buyer of a British pound call will profit if the British pound rises with a falling U.S. dollar.
True
An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan 50 put at 3. What is the investor’s maximum gain?
$500. If ABC stays at 50, both options expire and $500 is made. Remember, sellers cannot make more than the premium.
An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar 40 call at 3. What is the investor’s maximum gain?
The net premium of $400. Remember, sellers cannot make more than the premium.
An investor purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. Is this a debit or credit spread?
Since the larger premium is on the buy leg, this is a debit spread, bought for a net premium of 4.
An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. What is the investor’s maximum gain?
If the stock falls to zero, the investor could potentially make $4,400 ($4,700 - the $300 premium).
True or False: The Interbank Market is a fully regulated and centralized market.
False. The Interbank Market is unregulated and decentralized.
Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much intrinsic value does the option have?
0, it is at-the-money
A _______-based index measures the movement of a particular sector or industry.
Narrow
An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar 40 call at 3. Is the investor bullish or bearish on ABC?
She is bearish. The dominant leg is the sell leg, which makes the investor the seller of a call
An investor who buys stock and on the same day buys a put (creating a hedge) has established a ________________.
An investor who buys stock and on the same day buys a put (creating a hedge) has established a married put.
Buy 1 ABC Mar 30 call at 7 and sell 1 ABC Mar 40 call at 3. For profit, should the spread widen or narrow?
If the premium spread widens, the spread can be closed for more than $400. Remember, BUYER and WIDEN have 5 letters.
What does the acronym SILO stand for?
Short Inside ; Long Outside (for straddles)
What does the acronym CEN DEW stand for?
Credit expires Narrow ; Debit exercise Widen (for spreads)
Are Debit Call Spreads (DCS) bullish or bearish?
Bullish
Are Credit Put Spreads (CPS) bullish or bearish?
Bearish
For a DCS (debit call spread), think of:
In Washington DC you ride the bus (bus = bullish)
For a CPS (credit put spread), think of:
Child Protective Services send parents to jail on a bus (bus = bullish)
Credit goes together with Narrow or Widen?
Narrow (Credit and Narrow have 6 letters)
Debit goes together with Narrow or Widen?
Widen (Debit and Widen have 5 letters)
What is CAL PuSH used to help remember? What does each stand for?
Breakeven for Spreads ;
CAL (Call Add Lower XP)
PuSH (Put Subtract Higher XP)
What does BULLS concern? What does BULLS stand for?
Bull/Bear in any Spread ;
Because Ur Long Lower Strike (if you’re long the lower XP, you’re Bullish)
Working Capital equation:
Working Capital = Current Assets - Current Liabilities
Current ratio:
Current Assets / Current Liabilities
Debt-to-Equity ratio:
Total Liabilities / Equity (Shareholders’ Equity)
“LTD + SHE”
Acid Test (Quick Ratio):
(Current Assets - Inventory) / Current Liabilities
What does Other Peoples Monies Count help remember?
What departments an order goes through when placed ;
Order dept., Purchase & sales dept., Margin dept., Cashiering dept.
Dividend Payout ratio:
Annual Dividend / EPS
Current Yield:
Annual Dividends / Current Market Price
Parity of Common Stock:
Current Market Price / Conversion Ratio
Tax-Equivalent Yield (TEY):
Taxable Yield / (100% - Tax Bracket%)
Tax-Free Equivalent Yield (TFE):
Taxable Yield x (100% - Tax Bracket%)
Market Capitalization formula:
Shares Outstanding x Current Market Price
Equity in Long Margin (LM) account formula:
Equity = LMV (long market value) - DB (debit balance)
Equity in a Short Margin (SM) account formula:
Equity = SMV (short market value) - CB (credit balance)
Equity in both a Long Margin (LM) account with a Short Margin (SM) account formula:
Equity = LMV +SMV - DB - CB
Revised Debit Balance formula:
Equity
Breakeven for Writer of Covered Call:
Purchase Price - Premium Received
A Long Straddle consists of:
Buying Put + Call (Same XP & Exp.)
A Short Straddle consists of:
Selling Put + Call (Same XP & Exp.)
Sales Charge formula:
(Offer-Bid) / Offer
What is the Breakeven for Straddles?
Sum of both premiums
Total Bonded Debt formula:
Long Term + Short Term + Overlapping
Net Revenue formula:
Gross Revenue - Operating Expenses
POP formula:
NAV / (100% - Sales Charge %)
The maximum potential loss when selling short is ____________.
Unlimited
What does a Combination consist of?
A straddle (1 call and 1 put) with contracts that have different XPs OR Exp.
What type of option is the following:
Buy 5 DEF March 50 Calls at 3
Buy 5 DEF March 40 Puts at 1
Combination (straddle with different XP OR Exp.)
Define a Price Spread:
When the two options of the spread have the same expiration month, but different
strike prices (vertical, dollar)
Buy 1 ABC March 30 call
Write 1 ABC March 40 call
Define a Time Spread:
When the two options of the spread have the same strike price, but different expiration months (calendar, date, horizontal)
Buy 1 ABC March 30 call
Write 1 ABC June 30 call
Define a Diagonal Spread:
If the two options of the spread have different strike prices and different expiration months (merging of vertical + horizontal spreads)
Buy 1 ABC March 30 call
Write 1 ABC June 40 call
What type of Spread is the following:
Buy 1 ABC March 30 call
Write 1 ABC June 30 call
Price (dollar/vertical) Spread
What type of Spread is the following:
Buy 1 ABC March 30 call
Write 1 ABC June 40 call
Diagonal Spread
What type of Spread is the following:
Buy 1 ABC March 30 call
Write 1 ABC June 30 call
Time (calendar, date, horizontal) Spread
Is the following a Net Debit or Net Credit Spread:
Buy 1 ABC March 40 Call at 3
Sell 1 ABC March 45 Call at 1
Net Debit (Buy premium is higher)
Is the following a Net Debit or Net Credit Spread:
Sell 1 XYZ October 65 Put at 7
Buy 1 XYZ October 55 Put at 1
Net Credit (Sell premium is higher)
What is a Butterfly Spread?
2 spreads that are established simultaneously —one is a bullish spread
and the other is a bearish spread
Long 1 ABC June 90 call at 4,
Short 2 ABC June 80 calls at 7 each, and
Long 1 ABC June 70 call at 13
(1-2-1)
Purchasing a Protective Put? Why is it created? Bullish, Bearish, or Neutral?
Long Stock + Long Put (Protective Put) ;
Protection ;
Bullish ;
Max. Gain = Unlimited
Cost of stock + Premium – XP (x 100 sh.)
Purchasing a Protective Call? Why is it created? Bullish, Bearish, or Neutral? Breakeven? Max. Gain/Loss?
Short Stock + Long Call (Protective Call) ;
Protection ;
Bearish ;
Max. Gain = Short Sale Proceeds - Premium (x 100 sh.)
Max. Loss = XP + Premium - Short Sale Proceeds (x 100 sh.)
Writing a Covered Call? Why is it created? Bullish, Bearish, or Neutral? Breakeven? Max. Gain/Loss?
Long Stock + Short Call (Covered Call) ;
Generate Income ;
Bullish to Neutral
Breakeven = Cost of Stock - Premium
Max Gain: XP + Premium - Cost of Stock (x 100 sh.)
Max. Loss: Cost of Stock - Premium (x 100 sh.)
What is a Collar?
BOTH the writing of a covered call and the purchase of a protective put.
Long 100 shares of DEF at $62 per share and
Long 1 DEF May 60 put and
Short 1 DEF May 65 call
What is Ratio Writing? What is the objective?
A long stock position with an
unequal number of calls written against it ;
Buy 100 shares of XYZ stock at $78 AND
Sell 2 XYZ October 80 calls for a combined premium of 8;
Increase the income from writing more calls
than the number of shares of stock owned
Writing a Covered Put? What is the objective? Bullish, Bearish, or Neutral? Breakeven? Max Gain/Loss?
Short Stock + Short Put (Covered Put) ;
Generate Income ;
Bearish to Neutral ;
Breakeven = Short Sale proceeds - Premium
Max Gain = Short Sale Proceeds + Premium - XP (x 100 sh.)
Mas Loss = Unlimited
Net Debit Spread Profitability (widen/narrow)? Bullish, Bearish, or Neutral for Call/Put Spreads? Breakeven for Call/Put Spreads? Max. Gain/Loss?
Widen ;
Strategy for Call Spreads: Bullish ;
Strategy for Put Spreads: Bearish ;
B/E for Call Spreads = Lower XP + Net Premium ;
B/E for Put Spreads = Higher XP - Net Premium ;
Max. Gain = Difference in XP - Net Premium
Max. Loss: Net Premium
Net Credit Spread Profitability (widen/narrow)? Bullish, Bearish, or Neutral for Call/Put Spreads? Breakeven for Call/Put Spreads? Max. Gain/Loss?
Narrow ;
Strategy for Call Spreads: Bearish ;
Strategy for Put Spreads: Bullish ;
B/E for Call Spreads: Lower XP + Net Premium ;
B/E for Put Spreads: Higher XP - Net Premium ;
Max. Gain = Net Premium
Max. Loss = Difference in XP - Net Premium
Long Straddle Strategy (Volatility/Stability)? Breakeven? Max. Gain/Loss?
Volatility ;
B/E: XP + and - Total Premium ;
Max. Gain = Unlimited
Max. Loss = Total Premium
Short Straddle Strategy (Volatility/Stability)? Breakeven? Max. Gain/Loss?
Stability ;
B/E: XP + and - Total Premium ;
Max. Gain = Total Premium
Max. Loss = Unlimited
Writing Uncovered Calls Strategy? Breakeven? Max. Gain/Loss?
Bearish ;
B/E: XP + Premium
Max. Gain = Premium
Max. Loss = Unlimited
Writing Uncovered Puts Strategy? Breakeven? Max. Gain/Loss?
Bullish ;
B/E: XP - Premium
Max. Gain = Premium
Max. Loss = XP - Premium (x 100 sh.)
Buying Calls Strategy? Breakeven? Max. Gain/Loss?
Bullish ;
B/E: XP + Premium
Max. Gain = Unlimited
Max. Loss = Premium
Buying Puts Strategy? Breakeven? Max. Gain/Max. Loss?
Bearish ;
B/E: XP - Premium
Max. Gain = XP - Premium (x 100 sh.)
Max. Loss = Premium
What is the EPIC used to remember?
Exporters buy Puts ; Importers buy Calls
An investor who is Bullish should do what 2 things? Which has more Risk?
1) Buy a Call
2) Sell a Put (substantial risk)
An investor who is Bearish should do what 2 things? Which has more Risk?
1) Buy a Put
2) Sell a Call (unlimited risk)
An investor who is long stock and wants protection should:
Buy a Put
An investor who is long stock and wants to generate income should:
Sell a Covered Call
An investor who is short stock and wants protection should:
Buy a Call
An investor who is short stock and wants to generate income should:
Sell a Covered Put
An investor who is long portfolio of stock and wants protection should:
Buy a Narrow-Based Index Put
An investor who is long portfolio of stock and wants to generate income should:
Sell a Narrow-Based Index Call
An investor who is expecting volatility should:
Buy a Straddle or Combination
An investor who is expecting stability should:
Sell a Straddle or Combination
An investor who is mildly bullish, wants to assume limited risk, and is willing to accept limited gain could do what 2 things?
1) Make a Debit Call Spread
2) Make a Credit Put Spread
An investor who is mildly bearish, wants to assume limited risk, and is willing to accept limited gain could do what 2 things?
1) Make a Credit Call Spread
2) Make a Debit Put Spread
An option’s premium is determined by the following formula:
Intrinsic Value + Time Value
What is a Married Put? What is the cost basis?
When an investor buys shares of stock and, ON THE SAME DAY, buys a put on the stock ;
Cost Basis = Cost of Stock + Cost of Option
If an investor has owned a stock for less than one year and then buys a put on that stock, the stock’s holding
period will be ______
Terminated
If an investor buys shares of stock and establishes a long-term holding
period, a subsequent put purchases has ______ affect the client’s holding period in the stock.
No affect (considered long term if shares held 1+ year)
If an investor believes Yields (interest rates) will increase, they could do what 2 things?
1) Buy Yield-Based Calls
2) Sell Yield-Based Puts
If an investor believes Yields (interest rates) will decrease, they could do what 2 things?
1) Buy Yield-Based Puts
2) Sell Yield-Based Calls
Australian Dollars, British Pounds, Canadian Dollars, Euros, and Swiss Francs have a Units/Contract size of _____. What is the currency that differs from this rule and what is its Units/Contract size?
10,000 ;
Japanese Yen (1,000,000)
Currency options based on the value of a foreign currency as it compares to the U.S. dollar settle in _______(U.S. Dollars/Foreign Currency)
U.S. Dollars
The U.S. dollar has an _______ relationship to foreign currencies
Inverse
Are options on the U.S. dollar available within the U.S.?
No
How can U.S. investors who want to utilize options on the U.S. dollar achieve their goal?
By taking option positions on a foreign currency with the U.S. dollar on the other side of the contract. An investor’s gain/loss is based on this inverse relationship between value of the foreign currency and the value of the US dollar (Options on U.S. dollar are not sold within U.S.)
What is the Interbank Market?
Where foreign exchange rates are established (the market in which the purchasers and sales of foreign currencies occur between commercial banks–these banks act as brokers for other banks and commercial customers)
Is the Interbank Market regulated? Centralized?
Neither regulated nor centralized
How do VIX options settle (American/European)?
European Style in Cash
When do European style options expire?
3rd Friday of every month
What do VIX options concern and what index are they connected to? How does a VIX option move in relation to this index?
Volatility of S&P 500 ; Inversely (Increase in S&P 500, VIX option decreases in value)
Investors buy VIX calls when they expect the S&P 500 index to _____ and volatility to ______
Decline ; Increase
Investors buy VIX puts when they expect the S&P 500 index to ______ and volatility to _______
Rise ; Decrease
The buyer of an Index Call is _____
Bullish
The writer of an Index Call is ______
Bearish
The buyer of an Index Put is _____
Bearish
The writer of an Index Put is _____
Bullish
An Opening Purchase is liquidated by a ______
Closing Sale
An Opening Sale is liquidated by a:
Closing Purchase
Liquidating an option means an investor (either buyer or seller) executes an ______ opposite transaction on the same option contract
Opposite
Who clears options contracts?
The Options Clearing Corporation (OCC)
Does the OCC guarantee that a buyer will be able to exercise their right in the even of a deficiency (bankruptcy) on the part of a writer?
Yes
The OCC removes ______ risk from standardized options transactions by acting as a seller for every buyer and a buyer for every seller
Contraparty Risk
What is the maximum expiration for a LEAP?
39 months
An Even Stock Split warrants an adjustment made to existing option contracts–there is an ______ in the number of option contracts and a _______ in the XP. Is the number of shares underlying each option adjusted for an even split?
Increase ; Decrease ; No
-If XYZ stock splits 2-for-1…
1 XYZ May 30 call will now own 2 XYZ May 15 calls with each contract still
representing 100 shares. Notice that the original 100 shares x $30 equals $3,000 and
the adjusted 2 contracts for 100 shares x $15 also equal $3,000.
An Odd Stock Split warrants an adjustment made to existing option contracts–does this result in an increase in the _______ (number of options contracts/number of underlying shares) and a _______ in the XP. Is the number of shares underlying each option adjusted for an odd split?
Number of underlying shares ; Decrease ; Yes
-If XYZ stock splits 3-for-2…
1 XYZ May 30 call (representing 100 shares) will now own 1 XYZ May 20 call
(representing 150 shares). Notice that the original 100 shares x $30 equals $3,000
and the adjusted contract for 150 shares x $20 also equals $3,000.
What happens in a Reverse Stock Split? Why does a company do it?
Company reduces the number of underlying shares and increases the XP of the contract ; Increasing market price of stock attracts investor attention.
-If ABC stock is split 1-for-5…
1 ABC October 10 call (representing 100 shares) will now own 1 ABC 50 call
(representing 20 shares)
How is an option adjusted in the event of a Stock Dividend?
The adjustments made are identical to those made for an odd stock split (i.e., the number of underlying shares per contract increases and the exercise price decreases proportionately).
-If XYZ announces a 25% stock dividend…
1 XYZ May 30 call (representing 100 shares) will now own 1 XYZ May 24 call
(representing 125 shares)
An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What is the investor’s maximum gain?
Unlimited gain on the long call, $3,600 gain on the long put. Gains occur if the stock rises or falls dramatically.
An investor buys an OEX May 475 call at 10. What is his strategy? On what index?
Bullish ; S&P 100
Joe sells 1 RFQ May 40 call. To create a credit call spread, Joe buys 1 RFQ May call with a strike price that is ______.
Higher
Consider the following: ABC Sep 45 Put at 6 If ABC is trading at 41, how much intrinsic value does the option have?
$4.00 or 4 points
How would an option order ticket be marked for an investor whose initial transaction was the purchase of a call?
Opening Purchase
What could an investor do if she expects the market to rise and volatility to decrease?
Buy VIX Puts
Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim’s maximum loss?
$3,550 (XP - Premium)
True or False: A 60 call with the market at 63 is in-the-money.
True
Marty buys 1 ABC May 55 Call at 4. Later, if ABC is at 51 and the option expires, what is Marty’s gain or loss?
Loss of the $400 premium
What could an investor do if she expects the market to decline and volatility to increase?
Buy VIX Calls
An investor holds 1 XYZ January 80 Put at 5. What is her strategy?
Bearish (to find strategy for put buyers, use the phrase PUT DOWN)
An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. What is the investor’s maximum gain?
The net premium of $700. Remember, sellers cannot make more than the premium.
Sue sells 1 XYZ Jan 50 put. To create a short straddle, Sue must _______________________.
Sell 1 XYZ Jan 50 call.
What is time value?
The option’s premium minus the intrinsic value.
True or False: A straddle consists of a long and short option position.
False. A straddle consists of either a long call and long put or a short call and a short put.
An investor buys an OEX May 475 call at 10. What is his breakeven point?
475 + 10 = 485 (strike price plus the premium or CALL UP)
An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan 50 put at 3. What is the investor’s strategy? (Volatility/Stability)
Stability (SILO)
Name 3important factors for determining the premium of an equity option
- Stock’s market price vs. XP
- Time left until expiration
- Volatility of the underlying security
Volatility tends to increase during a ___________ (increasing/declining) market.
Declining (bear)
An investor purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. What is the investor’s maximum gain?
$600. If the stock rises, the investor could profit starting from the breakeven of 64 up to 70.
A put option gives the owner the right to ______.
Sell
Sell 1 RST May 95 put at 8 and buy 1 RST May 80 put at 1. To profit, should the spread widen or narrow?
If the premium spread narrows, much of the $700 net premium is kept. Remember, SELLER and NARROW have 6 letters.
Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s strategy?
Bullish (CALL UP)
True or False: Option sellers want contracts to expire at-the-money or out-of-the-money.
True. If the option expires worthless, the seller would keep the premium.
Al sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. What is Al’s maximum loss?
$600. If XYZ rises, Al can buy stock back at 50 ($300 loss), plus he would lose the premium ($300 loss).
An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What are the breakeven points for the investor?
50 + 4 = 54 and 40 - 4 = 36. The combined premium of 4 is added to 50 (CALL UP) and subtracted from 40 (PUT DOWN).
A position similar to a straddle, but with different expirations and/or different strikes is called a _____________.
Combination
Identify the spread: An investor buys 1 JMK May 60 call and sells 1 JMK May 65 call.
A spread with different strike prices is a Price/Vertical spread.
A spread with different XPs is a ______ spread
Price (vertical, dollar)
With options, what terms are synonymous with seller?
Writer, short
Holden buys 1 STC 65 Call at 3. Later STC rises to 72 and the call is liquidated at 8.50. Is there a gain or loss?
Gain of $550 (determined by the difference between the $300 paid for the option and the $850 received on the sale).
To convert the terms of a Japanese yen contract to U.S. dollars, the decimal is moved ______ places to the left.
4 (normally 2)
Given the same expiration months and no premiums, how is the more valuable option in a call spread identified?
The call option with the lower strike price is always more valuable. (BULLS)
Upon exercise, what must index option sellers deliver to the buyers?
The in-the-money amount of the contract (based on the close) multiplied by $100
True or False: A 95 put with the market at 90 is in-the-money.
True
The maximum expiration for LEAPS is _____ months.
39
An investor writes 1 DEF May 55 Call at 6. What is the maximum loss?
Unlimited, assuming the call is uncovered (investor does not own the underlying stock).
An investor holds 1 XYZ Jan 80 Put at 5. Does she have a right or an obligation? To buy or sell?
Right to sell at XP (80)
VIX options use a __________ style exercise and settle in ______.
European ; cash
True or False: Options are derivatives since their value is based on the changing value of an underlying instrument.
True
Jim has owned BNB stock for 9 months and now buys a BNB put to hedge. Does the put purchase affect Jim’s holding period?
Yes, the put purchase terminates the stock’s holding period.
What are the hours of operation for the Interbank Market?
24 hours a day
If exercised against, the writer of an equity put option is obligated to ____ the underlying stock.
Buy
Identify the acronym: VIX
CBOE’s Volatility Index
Identify the position: An investor buys 1 GDG Mar 50 call at 4 and buys 1 GDG Mar 50 put at 4.
Straddle
If investors have a stock position AND an option position, will strategy be determined by the stock or the option?
The stock position is the primary focus since gains or losses are determined by the stock’s movements.
An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. What is the investor’s breakeven point?
47 - 3 = 44 (short sale proceeds - the premium paid)
What is a LEAP?
A long-term equity option (maturity of up to 39 months)
If a long put or short call is exercised and the investor delivers stock, he must determine his _________________. (Sales Proceeds/Cost Basis)
Sales Proceeds
Equity options are based on a 100 share multiplier, while index options are based on a $______ multiplier.
$100
True or False: A 110 put with the market at 108 is out-of-the-money.
False, it is in-the-money.
Ken buys 1 ABC Dec 75 call. To create a long straddle, Ken must _____________________.
Buy 1 ABC Dec 75 put
An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. Is this a debit or credit spread?
Since the larger premium is on the buy leg, this is a debit spread, bought for a net premium of 4.
True or False: Buyers of straddles are seeking volatility, while sellers of straddles are expecting stability.
True (SILO)
Identify the position: An investor writes 1 STC Jul 70 put at 7 and owns 1 STC Jul 60 put at 3. (Straddle or Spread)
A spread, which is the sale and purchase of calls or puts.
An investor writes 1 DEF May 55 Call at 6. What is the breakeven point?
55 + 6 = 61 (strike price + premium or CALL UP)
Sandra buys 1 ABC Dec 70 Call at 4. Does Sandra have a right or an obligation? To buy or sell?
Right to buy at 70
For tax purposes, what is determined when a long call or short put is exercised and the investor acquires stock? (sales proceeds/cost basis)
Cost Basis
An investor writes 1 DEF May 55 Call at 6. Later at expiration, if DEF has fallen to 53, is there a gain or loss?
A $600 gain on the premium
An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar 40 call at 3. What is the investor’s breakeven point?
30 + 4 = 34 (always between strikes). For call spreads, the net premium is added to the lower strike (CALL UP).
True or False: Both the buyer and seller of an option have the right to exercise.
False. Only buyers can exercise the contract.
Will the number of option contracts held be adjusted for both odd splits and stock dividends?
No. Odd splits and stock dividends increase the shares per contract and decrease the strike price.
To offset an option purchase, an investor would execute a ________________.
Closing sale
What is intrinsic value?
The amount by which the option is in-the-money
How would an option order ticket be marked for an investor whose initial transaction was the sale of a put?
Opening Sale
The maximum loss for an option buyer is the ____________.
Premium
Sandra buys 1 ABC Dec 70 Call at 4. What is Sandra’s maximum loss?
Premium of $400
Julio bought a 75 call at 5 and later exercised the option. What is Julio’s cost basis?
75 + 5 = 80 (strike price plus the premium)
True or False: A 95 call with the market at 95 is in-the-money.
False. It is at-the-money
An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is the investor’s maximum loss?
Unlimited loss on the short call, $5,900 loss on the short put. Losses occur if the stock rises or falls dramatically.
Short-term capital gains on option positions are taxed as _________________.
Ordinary Income
Is there any difference between the exercise of an index option and an equity option?
Yes, index options are cash-settled while equity options are settled by delivery of a specific security.
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What is the investor’s maximum gain?
$800. If stock falls and the put is exercised, the short stock is covered at 30 ($500 gain) plus premium ($300 gain).
Jim shorts 1 MNO Aug 40 Put at 4.50. MNO later falls to 32 and Jim liquidates at the intrinsic value. Result?
A loss of $350. Jim originally received $450, but then closed out by paying $800, netting a $350 loss.
True or False: Maximum gains and maximum losses could be unlimited with vertical spreads.
False. Spreads limit both gains and losses. Remember, net premium is the loss for the buyer and the gain for the seller.
For a spread, the ______ is the max. loss for the buyer and the gain for the seller
Net Premium
An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. What is the investor’s maximum gain?
Unlimited, since the stock’s upside is infinite
An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What is the investor’s maximum loss?
$400. If DEF stays between 50 and 40, both options expire. Remember, buyers cannot lose more than the premium.
Buy 100 shares of IBM at 91 and also Buy 1 IBM Nov 90 put at 2. If IBM later falls to 84, what is the maximum loss?
$300. At exercise, the stock bought at 91 can be sold at 90 ($100 loss) plus the cost of the option ($200 loss).
True or False: An investor who is long 100 shares of ABC stock and long an ABC put is bearish on the stock.
False. The purchase of the put is designed to protect against downward price movement.
An investor buys an OEX May 475 call at 10. What is his maximum loss?
The premium of $1,000 (the value of 10 x $100)
Jill buys 1 XYZ Jun 70 put. To create a credit put spread, Jill sells 1 XYZ Jun put with a strike price that is _______.
Higher
What is an uncovered call position?
The sale of a call (obligation to sell) without owning the stock
An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar 40 call at 3. What is the investor’s maximum loss?
$600. If the stock rises, the investor could lose starting from the breakeven of 34 up to 40.
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What are the breakeven points for the investor?
70 + 8 = 78 and 70 - 8 = 62. The combined premium of 8 is added to 70 (CALL UP) and subtracted from 70 (PUT DOWN).
If the OCC examines position limits on STC, what contracts are added on the bearish side of the market?
Long puts and Short calls
Buy 1 XRX May 60 call at 6 and write 1 XRX May 70 call at 2. For profit, should the spread widen or narrow?
If the premium spread widens, the spread can be closed for more than $400. Remember, BUYER and WIDEN have 5 letters.
An investor purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. What is the investor’s breakeven point?
60 + 4 = 64 (always between strikes). For call spreads, the net premium is added to the lower strike (CALL UP).
Identify the position: An investor sells 1 ABC May 30 call at 3 and purchases 1 ABC May 35 call at 1. (spread/straddle)
Spread
If Will has held ABC stock for 3 years and then buys a put on ABC stock, is the holding period affected?
No, once a long-term holding period is established, it is not destroyed by a put purchase.
An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. What is the investor’s maximum gain?
$600. If the stock rises, the investor could profit starting from the breakeven of 34 up to 40.
Consider the following: TNT Jun 80 call at 3 If TNT is trading at 78, how much intrinsic value does the option have?
0, it is out-of-the-money
Long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. What is the breakeven point?
35 - 2 = 33 (always between strikes). For put spreads, the net premium is subtracted from the higher strike (PUT DOWN).
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What’s the investor’s breakeven point?
35 + 3 = 38 (short sale proceeds + premium received)
Identify the position: An investor shorts 1 XYZ May 50 call at 3 and is long 1 XYZ May 40 call at 5. (straddle/spread)
Spread
Write 1 DEF May 55 Call at 6. DEF rises to 63 and the investor closes the position at a premium of 9. What’s the result?
A $300 loss since the investor received $600, but paid $900. Closing out means to execute the opposite transaction.
Define a class of options.
All options with the same underlying interest and the same type (e.g. STC calls or STC puts)
Yield-based options are ______-based. (yield/price)
Yield
A _______-based index measures the market as a whole. (broad/narrow)
Broad
Jean bought an 80 put at 7 and later exercised the contract. Jean would have sales proceeds of how much?
$8,000 - $700 = $7,300 or 73 (strike price minus the premium)
Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim’s maximum gain?
The premium of $450
Sell 1 BKS July 40 call at 6 and buy 1 Oct 40 call at 10. Is the spread vertical or horizontal? Is it a debit or credit?
This is a horizontal spread (different expirations) and it is a debit spread (paid out more than what was received).
A horizontal spread can be identified by different ______
Expirations
Mary bought 100 shares of GMG at 40 and on the same day buys 1 GMG Apr 40 put at 3. What is Mary’s basis in the stock?
40 + 3 = 43 (The cost of the stock plus the cost of the option)
Emma sells 1 RST Oct 40 Put at 5. Later, if RST is at 43 and the option expires, what is Emma’s gain or loss?
Emma has a gain of the $500 premium.
An investor writes 1 DEF May 55 Call at 6. What is the maximum gain?
The premium of $600
When may European-Style options be exercised?
Only on the expiration date
True or False: A spread consists of both a long and short option position.
True. A spread consists of either a long call and short call or a long put and short put.
An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is the investor’s strategy? (volatility/stability)
Stability
Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much time value does the option have?
$2.00 or 2 points
Sid purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. Is Sid bullish or bearish on XRX?
Sid is bullish. The dominant leg is the buy leg, which makes the investor the buyer of a call.
Identify the spread: An investor writes 1 ABC Jan 75 put and is long 1 ABC Mar 75 put.
A spread with different expirations is a Calendar/Horizontal/Date spread.
Consider the following: ABC Sep 45 Put at 5 If ABC is trading at 41, how much time value does the option have?
$1.00 or 1 point
An investor writes 1 DEF May 55 Call at 6. Does she have a right or an obligation?
Obligation to sell at 55
Writers of a call have an obligation to ____ (Buy/Sell) at XP
Sell
Writers of a put have an obligation to _______ (Buy/Sell) at XP
Buy
Consider the following: TNT Jun 80 Call at 3 If TNT is trading at 78, how much time value does the option have?
$3.00 or 3 points
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investor’s strategy? (Volatility/Stability)
Volatility (SILO)
World currencies trade in the _____________________.
Interbank Market
If a married put is established and the option expires, what happens to the investor’s basis?
The basis (cost of the stock plus the cost of the option) will stay the same even after expiration.
An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What is the investor’s maximum loss?
$2,800 if the stock falls to zero. The investor would lose $3,000 on the stock, but keep the $200 premium.
Buy 1 STP Jan 50 call at 6 and sell 1 Jan 60 call at 2. STP is at 59 and options are closed at intrinsic value. Result?
A gain of $500. Initially there is a net debit of 4, and later offset for a net credit of 9 (9 - 4 = 5).
True or False: To close (sell) or to exercise for profit, option buyers want contracts to become in-the-money.
True
Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim’s strategy? (Bullish/Bearish)
Bullish
An investor purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. What is the investor’s maximum loss?
The net premium of $400. Remember, buyers cannot lose more than the premium.
An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. Is the investor bullish or bearish on RST?
She is bullish. The dominant leg is the sell leg, which makes the investor the seller of a put.
What is the underlying instrument used to calculate the VIX?
Real-time S&P 500 option bid/ask quotes weighted to a constant 30-day measure of expected volatility
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What’s the reason for selling the put?
To generate income (the premium); also note the premium provides a partial hedge against upside risk.
A date spread is synonymous with a __________ spread. (horizontal/vertical)
Horizontal
A call option gives the owner the right to _____.
Buy at XP
An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What is the investor’s maximum gain?
$700. If the stock rises and the call is exercised, the 30 stock is sold at 35 ($500 gain) plus the premium ($200 gain).
If an investor is short a call, how could that option be covered? (4 ways)
1) Be long
2) Own convertibles
3) Present escrow receipt
4) Own a call (lower XP, same or later expiration)
Mark sold an 80 put at 7 and was later exercised against. What is Mark’s cost basis?
80 - 7 = 73 (strike price minus the premium)
An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. Is the investor bullish or bearish on IBM?
Bullish since they are long the stock. The put is purchased to protect downside risk.
Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s breakeven point?
70 + 4 = 74 (strike price + premium or CALL UP)
