unit 2 Flashcards
stocks vs. options
stocks have no expiration date, while options have expiration dates
what is an option
options are contracts between a buyer and a seller, where the buyer has the right to buy or sell an underlying instrument at a specified price, and the seller has the obligation to fulfill the terms of the contract
open interest
open interest is the number of contracts in existence, with long positions representing of puts or calls, and short positions representing sold (written) puts or calls
intrinsic vs time value
intrinsic value is the amount by which an option is in the money, while time value is the amount of option value in excess of its intrinsic value
exercise vs. assignment
exercise involves buying (call) or selling (put) shares of the underlying stock, while assignment is the reverse of exercise
mechanics of being assigned
assignment occurs on short (written) positions, with the owner tendering an exercise notice to the broker
strike price intervals
strike price intervals are generally 2 1/2 points when the strike price is between $5 and $25, 5 points when the strike price is between $25 and $200, and 10 points when the strike price is over $200
premium quotation
premium quotation is stated in decimals, with one point equaling $100
expiration date
the expiration date is typically the saturday following the third friday of the expiration month
calls vs. puts
calls give the buyer the right to buy, while puts give the buyer the right to sell
in the money, at the money, out of the money
these terms describe the relationship between strike price and the current price of the underlying instrument
buyers
buyers can either by to open or buy to close positions
sellers
sellers can either sell to open or sell to close positions
why buy a call instead of the underlying stock
limit risk
why buy a put
provides insurance for a position, lower profit potential than selling stock short
mechanics of exercising
exercising an option involves the other side of assignment mechanics
underlying instrument
the underlying instrument can be a stock, commodity, futures, foreign currency, or stock index
exercise style
american-style options can be exercised on any business will result in delivery of the underlying stock on the third business day following exercise
margin
purchase of puts or calls with 9 months or less until expiration must be paid for in full. writers of uncovered puts or calls must deposit/maintain 100% of the option proceeds plus 20% of the aggregate contract value
last trading day
trading in equity options will ordinarily cease on the business day (usually a friday) preceding the expiration date
call option
a call option lets you buy stocks at a set price for a certain time
- key point: buyer can choose to buy; seller must sell if asked
- quantity: each contract is for 100 shares
buying calls
betting on stock price going up
-example: buy a call at $50, if stock goes to $56, profit $400
selling calls
selling calls is betting the stock will go down
two types of selling calls
covered calls (own stock) and naked calls (don’t own stock)
