Topic 4 - Option Prices

Question 1

Definition of an Call/Put Option

Answer 1

A financial contract that gives the owner the right but not the obligation to buy/sell an asset at a fixed price at some future date

Question 2

Option Holder

Answer 2

the buyer of the contract, referred to as having a long position

Question 3

Option Writer

Answer 3

is the seller of the contract, referred to as having a short position

Question 4

what is the difference between American and European options

Answer 4

US options can be exercised at any time before expiration whereas EU options can only be used on the expiration date.

Question 5

At-the-money

Answer 5

when the current market price is equal to the exercise price

Question 6

in the money / out the money

Answer 6

when the current market price of a stock is higher or lower than the exercise price

Question 7

Why use an option ?

Answer 7

if someone sees a good opportunity but doesn’t have the money yet, they can buy put options to capture the gain

Question 8

Call Option

Answer 8

Gives us the right to buy a stock at a predetermined price. If the current price is higher than our exercise price then we buy it at our lower price and sell it at the current price to make a profit

Question 9

Put Option

Answer 9

Gives us the right to sell a stock at a predetermined price. If the current price is lower than out exercise price then we will buy it now at current price