Options - General Flashcards
Who has rights & who has obligation
Buyer/Owner/Holder/Long has rights; Seller/Writer/Short has obligations
What is entity that sets standards for options
OCC - Options Clearing Corporation
What underlying security can be used for an option
stock, stock market index, foreign currency, interest rate, or government bond
Difference between American-style and European-style options
American-style: can exercise contract any time before expiration
European-style: exercised only on bus day preceding expiration
European style usually only used for currency options
How many shares in an equity option
100
What are mini-options
CBOE (Chicago Board Options Exchange) offers option contracts with only 10 shares instead of 100 shares. Multiplier is 10 e.g. premium of 2 is 20 (2 x 10)
What type of security is an option
Derivative security: value is derived from the value of the underlying instrument e.g. stocks
Every option contract has what 3 stipulations
- Underlying instrument; anything with fluctuating value
- Price; strike or exercise price
- Expiration; Std is 9 months, expiring on Sat following the 3rd Fri of expiration month @ 11:59pmET
3 types of expiration on options
- Std: 9 mos, expiring on Sat following 3rd Fri of expiration month
- LEAPS (Long term equity anticipation securities: 39 mos but most trade with 30 mo life cycle
- Weekly: Issued on Thurs and expire nxt Fi
Long XYZ Jan 65 call at 7, CMV is 70;
Short XYZ Jan 65 call at 7, CMV is 70;
Short XYZ Jan 45 call at 4, CMV is 39
In, at or out of money? Breakeven point? How much intrinsic value?
In,72,$500 (70-65*100); same; Out, 49, 0
- B/E = Strike + Premium
- Intrinsic is never -ve; Market price - Strike price
Long XYZ Sep 65 put at 2, CMV is 70;
Short XYZ Jan 65 put at 2, CMV is 70;
Short XYZ Sep 45 put at 8, CMV 39
In,at or out of money? Breakeven point? How much intrinsic value?
Out, 63,0 ; same; In, 37, $600 (39-45*100)
- B/E = Strike - Premium
- Instinsic value is never -ve; Market price - strike price
