Unit 4 Flashcards
Options
In the Money
Keep in mind this is how much the option is above or below the strike price
INTRINSIC VALUE
It does not need to be covering the premium
Calls in money
When the market price is above the SP, Long or Short
Puts in money
When the the market price is below the SP, long or short
Option premium reflects two types of values
Intrinsic and Time
Intrinsic value
The amount by which the option is in the money
Time value
Market’s perceived worth of time remaining to expiration
Options Quotes
Quoted on a per share basis
Factors affecting premium
Volatility
Amount of intrinsic
time remaining until expiration
Interest rates
Greatest influence is volatility of underlying stock
Calculation of Premium
Intrinsic Value + Time Value
Reasons to buy calls
Speculation
Deferring a decision
diversifying holdings
protection of short position
Buy call speculation
Less investment
Investor can speculate on upward price by only paying premium
Buy call Decision deferr
Investor can buy a call on a stock and lock in purchase price until the option expires
Buy call diversify holdings
Cheap way to diversify portfolio
Buy call protect short stock
Option acts as insurance against rising price of stock
Buy call maximum gain
Unlimited
Buy call maximum loss
Premium paid
Reasons to sell call
Speculation
Increasing returns
Locking in sale price
Protection of long position
Sell call speculation
Additional income can be earned by keeping premiums
Sell call locking in sale price
If an investor has an unrealized profit in a stock and wants to sell, a written call can lock in the profit
Sell call protection of long position
limts downside to the extend of the premium received
Sell call maximum gain
Premium received
Sell call maximum loss
Unlimited
Exercise contract regular way (timing)
T+2
Closing transaction
If the investor sold, the option is closed by buying the option