Other investment vehicles Flashcards
What are considered derivatives
futures on commodities
options
Are futures considered secs
no
What is an option
two party contract with one in the party with the right to buy or sell the underlying asset
The amount paid for the contract when purchased or received when sold is called
contract premium
The buyer of an option is called the
owner
holder
long party
Buyers of an option risk
losing the premium if the opt expires worthless
On the buyers side, whats the process of buying and selling an option called
opening purchase
closing sale
The seller of an option is called
writer
short party
On the sellers side, whats the process of buying and selling an option called
opening sale
closing purchase
What are the types of option contracts
calls
puts
combined with purchase or sale, what are the 4 basic trans of options
buy calls
sell calls
buy puts
sell puts
What do the buyers of calls want
price to rise above strike
what do sellers of calls want and why
price to drop below or stay at strike to keep the premium when contract exps
what do buyers of puts want
price to fall below strike
what do sellers of puts wan t
price to be at or above strike
What are the market attitudes of the 4 options trans
buy calls bullish
sell calls bearish
buy puts bearish
sell puts bullish
Whats in the money for calls and puts
the buyers can make money by exer
Whats out of the money for calls and put s
seller will keep the premium if contract exps
Whats intrinsic value for options
buyers are in the money
= to the amount the contract is in the money
Whats parity for options
the premium = intrinsic val
Whats the formula for options premiums
intrinsic val + time val
What factors go into time val
time to expiration & volatility
Whats breakeven for calls
greater than strike + premium
Whats the max loss for buyers of options
loss of premium
Whats the max gain of buyers of option s
infinity for calls
difference between strike - premium to zero for puts
Main diff between equity and non equity options
contract size
delivery
exercise standards
Index opts are usu given what mult
100$
How to calc an index opts cost
premium X 100
How to calc total dollar val of the index
strike X 100
index opts exers settle when
T+1
equity opts exers settle when
T+2
When do index opts trading close
4:15 broad based
4 narrow based
What are the delivery rlues for index fund opts
If exer, cash delivery tomorrow
Consideration for what amount the writer needs to pay when the opt is exercised in the money
amount = intrinsic val based on closing price of the index, not at the time of exer
When do opts exp
third friday of the expiration month
Buying or selling (trading) opts for both equity and index settle
t+1
How are index opts commonly used
to hedge potential losses by buying puts
All yield based options are exercised
european style
When do currency options exp, settle and exercise
same as equity opts
settle t+1
exer t+1
exchange listed are european only
What currency opt would an exporter usu buy and why
buy puts bec of fear of the foreign currency dropping
What currency opt would an importer usu buy and why
buy calls
bec fear of foreign currency rising
diff between american and european stlye exer rules for opts
american exer whenever you want
euro only on exp day
which opts are american and which are euro style exer
equity and index opts american
currency and yield opts euro
Whats the formula to breakeven on protective putss
stock price rises enough to cover the premium paid
Whats the formula for the breakeven on a protective call
stock price falls enough to cover the premium paid
What selling positions in opts has unlimited risk and why
selling calls bec the stock can rise to infinity
What is a covered short opt contract
the writer already has the cash or stock to pay the exer
What are the 4 scenarios of a covered call opt
Im long a sto and I hedge my position buy writing (selling) call opts 2 dollars (thepremium) to buy the stock from me at 35 instead of the current 30 its at
1. price drops so the owner of the option I sold doesnt exer, I keep the premium which offsets the loss of value in my long sto position
2. price stay the same, val of the long sto posit didnt change, and the buyer doesnt exer because why would he buy the sto at 35 from me when he could buy it at 30 on the market, so I keep the premium
3. price rises a little but not past 35, again why would they exer when cheaper price on the market than the opt contract, so I keep the premium and the sto val gain
4. sto price shoots up to 40 and they exer, causing my gains to be blunted at 5/per inst of 10
What are key considerations when making covered call options
picking a good stock is still highly important bec loss in the sto val can greatly offset the premium amount gain in the opt
Who regs adding opts trading to a customer acc
OCC and CBOE
What needs to happen before an account can opts trade
an opt disclosure document and the registered opts principal of the firm needs to confirm
What needs to be returned within 15 days of an accs opts trading aproval
customer needs to return the signed opts agreement
Opts will exer automatically if
in the money by at least 1 cent unless told otherwise
Whats the proof of ownership for opts
the trade confirmation
What are some examples of municipal fund secs
Section 529 plans
local gov investment pools
Achieving a better life accs
What do the diff types of muni fund secs have in common
gov sponsored
What is a 529 plan
savings account for tuition of k-12 and or college
10k per year for k-12
tax free on gains if spent on tuition/qual expenses
considerations for 529 plans on how the money can be handled
if spent on non qual expenses, 10% penalty
transfer to a fam memb of the bene is allowed without penalty
if scholarship, able to pull that amount out without the penalty but still pay tax on gains
Who are the investors of local gov investment pools
other gov agencies
What are achieve a better life accs
tax advataged savings acc for disabled
criteria for having an ABLE acc
onset of disability was under 26
receiving benefits from SS insurance
tax consideration for ABLE accs
contributions are after tax
income earned from the acc is non tax
Limited partnerships (LPs) are considered
Direct participation programs
Considereation for LPs as a recommendation
highly illiquid
general partners cant what
compete personally
borrow from the partnership
commingle fund and personal funds
What the dissollution process for LPs
secured lenders
other creditors
LPs
GPs
What are some deductions that DPPs like a LP can use
depreciation
depletion of nat resources
accelerated depreciation like computers
intangible drilling costs
Passive losses in a LP cant be used to
reduce ordinary income for taxes only passive income
What are the two main risks of LPs
Lack of liquidity
changes in tax benefits bec of audits
Hedge funds are often organized as
LPs
what do REITs hold
commercial prop and or mortgages of commercial prop
What are the subchapter M rules for REITs
75% of income from RE
90% of net investment income distributed
Do Reits have to be registered or listed
no
Are REITs investment comps
no
How does ownership work with REITs
undivideed interest of the pool of investment
How do REITs handle gains and losses and how does that affect their classification
do not pass through losses so not a DPP
ETFs are considered what kind of sec
equity
What are ETFs similar to and why
index mut funds bec they can choose to mimic a particular index
Advantages of ETFs from index mut funds
trades secondary
can be bought with lev and shorted
usu less fees and taxes
Would an ETF or mut fund be better for a day trader and why
ETF bec a mut fund only prices the shares at end of the day
How are ETFs diff from mut index funds
trades secondary
can be bought w/ lev or shorted
What are the disadvs of ETFs vs mut funds
commissions of trades
over trading
market influences on price so could sell for less than NAV
What are ETNs
unsecured debt secs made by banks or financial institutions
How is money made with ETNs
price of the index rises by maturity bec no interest
considerations for risk of ETNs
backed by faith
limited issue sizes so limited supp so might pay a premium
REITs are taxed as a
conduit
