Options Strategies

Question 1

What is the only time it makes sense to exercise an option early?

Answer 1

If you have a call option on the day before dividends are paid.

Question 2

What are option strategies?

Answer 2

Combinations - options are very risky, but they can offer protection (hedging) in combinations.

Question 3

What do you achieve by combining share + put?

Answer 3

Lower upside potential, but also limits downside risk.
- the put serves as insurance for price drops

Question 4

What are other option strategies?

Answer 4

1. Synthetic stock
2. Call spread
3. Put spread
4. Straddle (strangle)

Question 5

What is a call spread?

Answer 5

Buy call + write call at higher X

Question 6

What is a put spread?

Answer 6

Buy put + write put

Question 7

What is a straddle (strangle)?

Answer 7

Buy call + put at same (different) X

Question 8

What is a synthetic stock?

Answer 8

• write put and buy call option at same X
• option combination mimics payoff of stock investment
• usually, X is the current stock price S
• premiums more or less cancel out

Question 9

Why would you choose the synthetic stock strategy?

Answer 9

Because it doesn’t require an investment from you right now.