Week 9 - Put & call options Flashcards

1
Q

Call option
Put option
European put/call option
American put/call option

A

Call option
- gives the owner the right, but not the obligation to BUY the underlying asset @ a specified strike price K, at a specified maturity date T
Put option
- same thing except the right to SELL

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Long position in a call
Short position in a call
Long put option
Short put option

^different ways to express. Show the shape of the payoff diagrams

A

See notes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

4 option strategies & when investors use them

A
  1. Straddle
    - when investor believes that the stock is VOLATILE (will move significantly) but have no particular opinion of which direction the stock price will move
    - investor can get payoff regardless of where ST moves
    - for speculation
  2. Reverse straddle
    - when investor believes that the stock has LITTLE VOLATILITY & believes that ST will be close to EXERCISE PRICE K
    - for reverse speculation
  3. Bull spread using calls
    - if investor has a MILDLY BULLISH VIEW but who wants a portfolio that is protected against extreme price moves
  4. Bear spread using puts
    - if investor has a MILDLY BEARISH VIEW about the underlying but wants a position that is not too sensitive to extreme market movements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Put-call parity & explain the strategies

Put-call parity with dividends formula

A

C0 + PV(K) = S0 + P0
C0 + K/(1+rrf)^T = S0 + P0

  1. Buy stock today and buy put
  2. Buy call and invest PV(K) at risk-free rate (ie. invest in a risk-free bond)

C0 + PV(K) + PV(DIVS) = S0 + P0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly