Pillar 3: Cash Flow

Question 1

Long position

Answer 1

owning an investment means that you are in a long position [e.g., you enter a long position by buying the stock, and then exit the long position by selling the stock]

Question 2

Short position

Answer 2

you enter the short position by borrowing from one individual and then selling it to another individual; after the item has fallen in value, then you can exit the short position by buying the item back at the new (and hopefully lower) price and return it to its owner

Question 3

Option

Answer 3

a contract that gives an investor the choice to either buy or sell a stock at a set price and time or to walk away from the deal completely

Question 4

Rate of return

Answer 4

money out – money in/ money in [e.g., $110 - $100/ $100 * 100 = 10%] OR (Vf –Vi)/ Vi * 100

Question 5

Intrinsic value

Answer 5

the difference between the stock price and the option strike price; if the strike price is lower than the stock price, then the call option has intrinsic value; e.g., stock’s trading at $52 and you can buy that same stock at $50 = option has an intrinsic value of $2; the intrinsic value will ideally increase as the time value decays

Question 6

Strike price

Answer 6

fixed price at which the stock shares can be bought or sold

Question 7

Expiration date

Answer 7

date when the contract is no longer valid

Question 8

Premium

Answer 8

amount of money paid for the option contract

Question 9

Option chain

Answer 9

Use an option chain to keep track of all the different options available for a specific stock [fyi you would buy @ the ask price offered by the seller, which is also the premium that you would invest for the choice to buy a company’s shares for that day] (please check pg. 416-425)

Question 10

Risk graph

Answer 10

shows how much value the option will gain or lose as the price of a particular stock moves

Question 11

Time graph

Answer 11

cost of the length of time that it would take to keep an option

Question 12

Call option

Answer 12

an agreement with another trader that gives you the right to buy a certain stock at a pre-determined price

Question 13

Put option

Answer 13

an agreement with another trader that grants you the right to sell a certain stock at a pre-determined price

Question 14

Front month

Answer 14

the last month, which is when the option expires

Question 15

Covered (option)

Answer 15

describing an option that is purchased alongside the corresponding shares or cash

Question 16

Naked (option)

Answer 16

not possessing the cash or underlying stock to deliver when needed to purchase the option

Question 17

Write (option)

Answer 17

sell (usu. a put option)