Unit 10 Flashcards
The point at which gains equal losses
Breakeven Point
A US dollar settled option security representing the right to buy or sell a specified amount of a foreign currency
Foreign currency option (FCO)
A security representing the right to buy or sell government debt securities
Interest rate option
When a portfolio manager buys puts on the index to offset loss of the market value of the stock falls
Portfolio insurance
An index designed to reflect the movement of the market as a whole
Ex: S&P 100, 500
Broad based index
Where the premium received on the short call is the same amount or higher than the premium paid for the long put
Cashless collar
Option strategy generally used to protect an unrealized gain on a long stock position
Collar
A blanket term for a number of option strategies involving a put and a call on the same stock at different strike prices, expirations or both
Combination
An options investors position of purchasing a call and a put on the same underlying security with the same exercise price and expiration month. The investor is looking for either a rise or fall in the price of the underlying security or futures contract and hopes to avoid a flat market
Long straddle
An options investors potions that results from buying a call and a put or selling a call and a put on the same security with the same exercise price and expiration month
Straddle
Determined by the option that is more costly of the two- the one with higher premium
Market attitude
An option strategy where the premiums paid for buying the long options are more than the premiums received for the short options- a net debit to customer account
Debit spread
An option position established by the simultaneous purchase and sale of options of the same class but with different exercise prices and expiration dates
Diagonal spread
The purchase and sale of two options on the same underlying security and with the same exercise price but with different expiration dates
Aka: time spread, calendar spread
Horizontal spread
The purchase and sale of two options on the same underlying security and with the same expiration date but with different exercise prices
Aka: price spread, money spread
Vertical spread
- In a quotation, the difference between the bid and ask prices
- An options position established by purchasing one option and selling another option of the same class buy of a different series
- The price difference between two futures contracts. It involves holding a long and a short position in two or more related futures contracts with the objective of profiting from a change in the price relationship
Spread
Reflects the current open interest in the trading of put options to call options. Can be used to gauge investor sentiment and can be calculated to measure broad sectors of the market
Put-call ratio
An option hedge position in which the investor writes more than one call option for every 100 shares of underlying stock the investor owns. As a result, the investor has a partly covered position and a partly naked position
Ratio call writing
An investor who writes a call option without owning the underlying stock or other related assets that would enable the investor to deliver the stock, should the option be exercised
Uncovered call writer
An investor who sells a put option while owning an asset that guarantees the ability to pay if the put is exercised
Covered put writer
An investor who sells a call option while owning the underlying security or some other asset that guarantees the ability to deliver if the call is exercised
Covered call writer
Bearish or neutral investor who wants the market to fall
Call writer
Bullish investor who wants the market to rise
Call buyer
Describes an in the money option trading at its intrinsic value
“Equal”
Parity
Formula for time value
Pre - IV
The amount an investor pays for an option above its intrinsic value. It reflects the amount of time left until expiration
Time value
When the market price of the underlying asset is less than the strike price
Advantageous to sellers
Out of the money
When the market price of the underlying asset equals the strike price
At the money
When the market price of the underlying asset exceeds the strike price of the option
Buyers want this, sellers do not
In the money
The potential profit to be made from exercising an option. A call option is said to have this when the underlying stock is trading above the exercise price
Intrinsic value
What is the settlement date the assigned parties are required to make upon exercise?
T + 2
The organization that issues options, standardized option contracts and guarantees their performance
Options Clearing Corporation (OCC)
What is the settlement date for options that are bought and sold?
T + 1
An options transaction in which the seller buys back an option in the same series; the two transactions effectively cancel each other out and the position is liquidated
Closing purchase
An options transaction in which the buyer sells an option in the same series; the two transactions effectively cancel each other out and the position is liquidated
Closing sale
Writer has obligation to buy 100 shares of a specific stock at the strike price if the buyer exercises the contract
Short put
Buyer owns the right to sell 100 shares of a specific stock at the exercise price if she chooses to exercise. The holder of the option can also sell the option if she desires
Long put
A call writer has the obligation to sell 100 shares of a specific stock at the strike price if the buyer exercises the contract
Short call
A call buyer owns the right to buy 100 shares of a specific stock at the exercise price before the expiration if he chooses to exercise. The holder of the option can also sell the option if he desires.
Long call
Receives premium from buyer
Credit to account when premium is received
Opens their position with a credit
Obligation when contract is exercised
Seller, short, writer
Pays premium
Debit in account when premium is paid
Opens their position with a debit to their account
Has the right to exercise
Buyer, long, holder, owner
A contract that represents the right to buy or sell a security or futures contract at a specified time. The purchaser acquired a right and the seller assumes an obligation
Option
The document a customer must sign within 15 calendar days of being approved for this type of trading. In it, the customer agrees to abide by the rules of exchanges and not to exceed position or exercise limits
Option agreement
An investment vehicle, the value of which is based on the value of another security. Futures, forwards, swaps and options are among the most common. Generally used by institutional investors to increase overall portfolio return or hedge portfolio risk
Derivative
