Options Pt 2 Flashcards
LEAPS
long term equity anticipation securities
Options with up to 3 yrs to maturity but at least over 1
Variables Affecting Options Prices (list)
Stock price Return volatility Dividends E TTM
Stock price
Calls become more valuable as stock-price increases
Puts become more valuable as stock-price decreases
Stock Return Volatility
Both calls and puts become more valuable in times of high volatility because there is a chance the price will move in the direction it needs to maximize
Dividends
Stock prices usually drop on the ex-dividend day, this is a con for calls and a good thing for puts assuming the dividend is large
Time to Maturity
Similar to volatility, TTM makes calls / puts makes valuable calls / puts more valuable
This may not always be true for European puts
Risk free rate
If the risk free rate is higher a European call will be more valuable because the PV will lower
Selling a Call vs Excersising
Selling a call gets you just as much as you would as exercising but maybe more because you would sell for the call-price which has the lower bound of its intrinsic value
Levered Transaction
exposes you to asset price fluctuation without paying full assett price, this is conceptually what we do w a call
long stock profit limit
unlimited gain because stock price has no upper bound
short stock profit limit
unlimited loss because stock price has not upper bound
Why call writers profits are inverse
If stock-price > E implies they are selling the call for a lower price than they would get on the open market so they loose
Why put writers profits are inverse
If E > stock-price implies they are buying the put for a higher price than they would get on the open market so they loose
long straddle
used to hedge bets against market volatility
written strandle
buy call and put from the same investor
