Week 2: Mechanics of options Flashcards
What are the option positions?
- Long call:
- buy a call (right to buy asset)
- Long put:
- buy a put (right to sell asset)
- Short call:
- sell a call (no right to buy asset)
- Short put:
- sell a put (no right to sell asset)
what are the expiration moth cycles?
- January cycle: Jan, Aprl, Jul, Oct.
- February cycle: Feb, May, Aug, Nov.
- March cycle: Mar, Jun, Sep, Dec.
what is the expiration date?
- Expiration date is the Saturday immediately
following the third Friday of the expiration
month
How is the cycle affected If expiration of current month has not yet been reached?
- Current month, following month, & next two
months in the cycle
How is the cycle affected If expiration of current month has passed?
- Next month, next-but-one month, & next two
months in the cycle
At the money call & put
- Call: ST = K,
- Put: ST = K
in the money call &put?
- Call: ST > K,
- Put: ST < K
out of the money call & put?
- Call: ST < K,
- Put: ST > K
option value =?
- The price of an option
- also = time value + intrinsic value
Intrinsic value =?
- the maximum of zero and the value the option would have if it were exercised
immediately.- Call: max(S - K, 0)
- Put: max(K - S, 0)
Time value for American & European option?
- For an American option time value is positive
- For an European option time value can be
negative
What is a option class?
- An option class is the set of all the options of the same type (call and put) and style (American or European) for a particular stock, index fund, or futures security (in other words having the same underlying) on a listed exchange
What is an option series?
- An option series refers to all options that are identical; that is they are the same type, have the same underlying, the same expiration date and the same exercise price
What is volume?
- Represents the total amount of contracts that have changed hands from buyer to seller, new or existing.
- Reflects the total number of contracts traded for a single day
What is open interest?
- Open Interest is the total number of outstanding
contracts that are held by market participants at the
end of each day - Represents total number of contracts still open (haven’t been exercised)
what does a 2 for 1 stock split mean?
- means that the option
holder gets the right to purchase 200 shares
for $15 per share
check week 2 notes for stock dividend example
it explains better
what is a position limits?
- maximum number of options contracts that an investor can hold on one side of the market
what is a exercise limits?
- maximum number of options contracts that can be exercised by an investor can
in any period of 5 consecutive business days
What do market makers do?
- Market makers (mm) facilitate trading.
- A market maker quotes both bid and ask (offer)
prices
What is the bid?
- The bid is the price at which the mm buys
What is the ask?
- The ask (offer) is the price at which the mm sells
- The market maker does not know whether the
individual requesting the quotes wants to buy or
sell
What is the bid-ask spread?
- The difference between ask and bid prices
what is the initial margin?
- initial amount deposited in account
what is the maintenace margin?
- minimum amount required
in the margin account
margin account for options less than 9 months?
no margin, full cash
margin account for options more than 9 months?
margin or borrowing: 25% of option value
