stock options

Question 1

What is a strike price?

Answer 1

Price specified in an option contract that the holder pay to buy shares (call) or receives to sell shares (put) if the option is exercised
–> striking or exercise price

Question 2

Which contract terms must a option require?

Answer 2

1. identity of underlying stock
2. strike price
3. option expiration date
   option contract size
4. option exercise style
5. delivery or settlement procdure

Question 3

What styles are there?

Answer 3

American: any time before expiration date
European: only on the day before expiration date

Question 4

What is option writing? Call writer and Put writer?

Answer 4

act of selling an option

Call writer: one who has the obligations to sell stock at the option’s strike price of the option is exercised

Put writer: one who has the obligation to buy stock at the option’s strike-rice if the option is exercised

Question 5

What is the option premium?

Answer 5

the price you pay for he option

Question 6

what is the protective put Strategy?

Answer 6

by purchasing a put option you have protected yourself against a price decline–> “eliminated the downside risk

Strategy of buying a put option on a stock already owned, protects a decline in value–> hedging

Question 7

What is the covered call stretagy?

Answer 7

write calls on stocks you already own
Covered call: strategy of selling a call option on stock already owned–> you keep the option premium no matter what; so you def. get the premium. no matter what. since you already own the stock you said to be covred