Unit 3 Flashcards
What is a contract that derives its value from an underlying asset?
A Derivative
What are the two parties that consist in a derivative?
A buyer and a seller
Derivatives are most often used for which types of assets?
Commodities
What is based on the value of a foreign currency versus the US dollar?
Currencies
What type of assets derives from that of an underlying instrument such as a stock, stock index, interest rate or foreign currency?
Options
What type of asset is not considered classified?
Futures
Which party in a option has the right to exercise the contract to buy or sell?
The buyer
Which party in an option is obligated to fulfill the terms of the contract?
The seller
What does the buyer risk in options?
Losing the premium paid for the contract if the option expires as worthless
What is the beginning step for the buyer and what is the second transaction?
Opening purchase»»>closing Sale
What does the seller profit from in a option?
The amount of premium received for the contract if the option expires as worthless.
What is the beginning step for the seller and what is the second transaction?
Opening sale»»>Closing purchase
List the characteristics of a buyer:
- Purchaser or holder
- Long
- Pays Premium
- Owns the right
- Is in control
List the characteristics of a seller:
- Writer
- Short
- Received premium
- Takes on obligation
What are the four basic transactions available to an option investor?
- Buy calls
- Sell calls
- Buy puts
- Sell puts
Buy Calls = Go ____
Long
Sell Calls = Go _____
Short
This is when a call buyer owns the right to buy 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract.
Buyer is bullish (anticipates security will rise)
Long Call (purchase)
Provide descriptions for the following:
Long, XYZ, Jan, 60, Call, 3
- Long - investor has bought the call and has the right to exercise
- Represents amount of shares
- Contract expires on the third Friday of Jan
- Strike price
- Type of option. Investor has right to buy the stock at 60 because he is long the call
- Premium (Issued with 100 shares)
Buyers of calls want the market price of the underlying stock to ____.
Rise
This is when a writer has the obligation to sell 100 shares of the specific stock at the strike price if the buyer exercises the contract.
Writer is bearish (anticipates the security will fall)
Short Call (Sale)
Provide descriptions for the following:
Short, XYZ, Jan, 60, Call, 3
- Short - Investor has sold the call and has obligations to perform if the contract is exercised
- Represents amount of shares
- Contract expires on the third Friday of Jan. If expiration occurs, the writer keeps the premium without any obligation.
- Strike price
- Type of option. Obligated to sell the stock at 60, if exercised because he is short call
- Premium (Issued with 100 shares)
Writers (sellers) of calls want the market price of the underlying stock to ____.
Fall or remain the same
What does the writer keep if the contract is unexercised by the time it expires?
The premium
Buy Puts = Go ____
Long
Sell Puts = Go _____
Short
This occurs when a buyer owns the rights to sell 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract.
Bearish investor (anticipates the security will fall)
Long put (purchase)
Provide descriptions for the following:
Long, XYZ, Jan, 60, Put, 3
- Long - Investor has bought the put and has the right to exercise
- Represents share amount
- The contract expires on the third Friday of Jan
- Strike Price
- Type of option. Investor has the right to sell the stock at 60, because he is long put
- Premium (Issued with 100 shares)
Buyers of put want the market price of the underlying stock to ____.
Fall
This occurs when a writer has the obligations to buy 100 shares of a specific stock at the strike price if the buyer exercises the contract.
Bullish Investor who wants the security to rise or remain the same.
Short put (sale)
Provide descriptions for the following:
Short, XYZ, Jan, 60, Put, 3
- Short - Investor has sold the put and has obligations to perform if the contract is exercised.
- Represents share amount
- The contract expires on the third Friday of Jen. If expirations occurs, the writer keeps the premium without any obligation
- Strike Price
- Premium (Issued with 100 shares)
A call buyer is a _____ investor because he wants the market to rise.
Bullish
A call buyer is exercised only if the market price ___ ___ the strike price.
Rises above
A call write is a ___ investor because he wants the market to fall.
Bearish
A call writer’s contract is not exercised if the market prices ____ ____ the strike price
Falls below
A put buyer is a ____ investor because he wants the market to fall.
Bearish
A put is exercised only if the market price ____ ____ the strike price.
Falls below
A put writer is a ____ investor because he wants the market to rise or remain the same.
Bullish
The contract for a put writer is not exercised if the market price ____ ____ the strike price.
Rises above
This type of option tracks the performance of a particular group of stocks.
If exercised, no delivery of the underlying shares is made. The writer pays the options owner the differential in cash.
Index options
This was created to measure expected volatility of the US stock market and is based on pricing from S&P 500 index.
Used to speculate on volatility of the equity markers.
Also known as “Fear Index”
Tends to spike upward when the stock market experiences a severe downdraft.
VIX options
Which type of option settles in cash with European exercise provisions?
VIX options
A call is ____ when the price of the stock exceeds the strike price of the call. A buyer will exercise calls.
In the money
A call is ____ when the price of the stock equals the strike price of the call. A buyer will not exercise.
At the money
A call is ____ when the price of the stock is lower than the strike price of the call. A buyer will not exercise.
Out of the money
A buyer wants ____ for calls. A seller does not.
In the money
A seller wants ____ for calls. A buyer does not.
At the money
A seller wants ____ for calls. A buyer does not.
Out of the money
____ _____ is the same as the amount a contract is in the money. A call has ____ ____ when the market price of the stock is ____ the strike price of the call.
This can never be negative. Its always a positive number or zero.
- Intrinsic Value
- Intrinsic Value
- Above
Options that are at the money or out of the money have an intrinsic value of ____.
Zero
____ like calls to have intrinsic value. ____ do not.
- Buyers
2. Sellers
A call that has no intrinsic value will simple be allowed to ____.
Expire
____ want the contract to move in the money for calls. ____ want the contract to move out of the money.
- Buyers
2. Sellers
A put is _____ when the price of the stock is lower than the strike price of the put. Buyer will exercise.
In the money
A put is ____ when the price of the stock equals the strike price of the put. Buyer will not exercise.
At the money
A put is _____ when the price of the stock is higher than the strike price of the put. Buyer will not exercise.
Out of the money
A buyer wants ___ for puts. A seller does not.
In the money
A seller wants ___ for puts. A buyer does not.
At the money
A seller wants ___ for puts. A buyer does not.
Out of the money
A put has intrinsic value when the market price of the stock ___ ____ the strike price of the put.
Falls below
A put that has intrinsic value will be _____
Exercised
A put option has ____ when the premium equals intrinsic value.
Parity
What two part make up a premium of an option?
Intrinsic value and time value
What is the math calculation to determine a premium?
IV + TV = Pr