Options Foundations

Question 1

State & describe the 3 types of options.

Answer 1

1. American - May be exercised at any time up to and including the expiration date
2. European - May only be exercised on the expiration date
3. Bermudan - Options may only be exercised on specific dates prior to expiration

Question 2

What is an option ?

Answer 2

An option gives its owner the right, but not the obligation to either buy or sell and underlying asset at a given price. An option seller is obligated to perform if the buyer exercises the option.

Question 3

Define a call.

Answer 3

The owner of a call option has the right to purchase the underlying asset at a specific price for a specified time period.

Question 4

Define a put.

Answer 4

The owner of a put option has the right to sell the underlying asset at a specific price for a specified time period.

Question 5

Purchasers of call options expect a ____ in the underlying asset. A call option is a ____ position.

Answer 5

Purchasers of call options expect a rise in the underlying asset. A call option is a bullish position.

Question 6

Purchasers of put options expect a ____ in the underlying asset. A put option is a ____ position.

Answer 6

Purchasers of put options expect a fall in the underlying asset. A put option is a bearish position.