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147 Cards in this Set
- Front
- Back
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Take not Writer of an Equity Option |
If the writer is assigned an exercise notice, they must fulfill the contract even if the underlying security has stopped trading on the principal exchange. |
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Option premium |
Is the cost of the option. |
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Covering short call options |
The writer of a call option can be covered in a cash account by owning the underlying stock, A convertible bond or an Escrow receipt. |
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Bank guarantee letter |
A bank guarantee letter may not be used to cover a written call option. |
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Municipal bond with a annual put option at par. |
A put able bond option can exercise at their own discretion and does not need permission of issuer. |
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Some characteristics of index options. |
1) cash settlement. 2) the usual trading unit is equal to 100 times the index. 3) exercise settlement is based upon the closing index value of the date of exercise. |
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Holder of a listed call options and dividends. |
They are entitled to receive a cash dividend only if effective exercise notice is filed with the OCC before the ex dividend date. |
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TBond Options and strikes. |
The strikes reflect the percentage of par value of bond. |
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Writer of Put options |
The writer of a put can be covered by depositing the exercise price amount of cash with his broker. No additional cash or margin will be required. |
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Option owner Definition |
The owner of an option has the right but not the obligation to buy or sell an underlying security at a fixed price. |
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In the Money option |
When an option is in the money, exercising the option would be profitable. Calls would be below the current market and puts would be above. The deltas would be close to 1.00 |
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At the money options |
When a option is at the money exercising would be more or less a scratch. Their delta would be about 50%. |
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Intrinsic value of an option. |
The intrinsic value of an option is the amount that the option is on the money. Only in the money options have intrinsic value. |
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Out of the money option |
When an option is out of the money , exercising it would mean a loss. |
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Call up Put down |
This phrase reminds you when the option goes in the money. Calls market goes up. Puts market goes down. |
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Option premium |
This is the amount that the purchaser pays for an option. Factors include: 1)In or out of the money. 2) time left to expiration. 3) volatility of underlying security. 4) investor sentiment. 5) interest rates. |
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Premium formula |
Premium= Intrinsic + time value |
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Action words for options Buyer |
Buys, holds, owns & long |
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Action words for options Seller |
Sells, writes or shorts. |
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Action words for options Protection vs Income |
Protection means buying puts to protect downside. Income means writing covered calls for income. |
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Take note T equations Max gain or Loss |
Many times you will be asked to figure max gain or loss. If your In column is empty max gain is unlimited. Usually the max loss will occur at exercise. |
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Action words for options Exercise. |
Exercise means to force the writer of option to accept or deliver securities. |
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Take note Opening or closing transactions |
It does not matter whether the transaction are both calls or both puts. |
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Straddles |
An option position when an investor either buys both puts and calls or sells both puts and calls |
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Long straddle |
When you buy a put and a call with the same strike. You expect volatility to increase and don't know direction. Max gain is unlimited and max loss is limited to premium. Break even is the total premium added and subtracted from the strike price. |
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Short straddle |
When you sell both a put and call with same strike . You expect volatility to decrease. You hope to collect premium with time decay. |
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Long combination |
This is when you buy a call and a put but they have different strikes. Sometimes called a Strangle or Collar. |
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Options expiration |
All options expire the Saturday following the third Friday except Foreign currencies. They expire the Saturday BEFORE the third Wednesday. |
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Take note Intrinsic value |
Intrinsic value = In the Money. |
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Take note Premiums |
Don't take premiums into account to determine if option is in the money. |
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Premium formula |
Premium = Intrinsic value + Time Value |
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T equation Note calls Same & Puts switch. |
In using a t equation remember that the premium and the strike are on the SAME side for CALLS and SWITCH sides for PUTS. |
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Short straddle Max gain and loss |
Max gain is premium received. Max loss is unlimited due to short call. |
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Break even short straddle. 2 points. |
Add premium to strike and subtract premium from strike. Profit is between strikes and losses outside the break even points. |
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Short combination Max gain and loss. |
Max gain is premium received. Max loss is unlimited due to short call. |
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Breakeven points short straddle. 2 points. |
Add premiums to call strike & subtract premiums from put strike. Profit is between the strikes. |
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Break Even Calls |
call up. Add premium to strike. UP |
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Break Even Puts |
Put Down. Subtract premium from Strike. DOWN. |
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Writing Options |
Max gain is premium received. |
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Max Loss Short Calls |
You are short unlimited risk and Max loss is infinite. |
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Max loss Puts |
You are short the strike and lowest it can go is zero. Therefore the Max loss is the Strike less zero or just the strike. |
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Max Gain and Loss Long straddle. |
Max gain is unlimited due to long call. Max loss = premiums paid. |
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Break even Long straddle 2 points |
The higher one is the premium added to the strike. The lower one is subtracted from the strike. |
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Short combination different strikes ( strangle) Max gain and loss. |
Max gain is premium received. Max loss is unlimited due to short call. |
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Breakeven points short combination with different strikes ( strangle) 2 points. |
Add premiums to call strike & subtract premiums from put strike. Profit is between the strikes. |
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Debit Spreads Calls Max gain and Loss. |
Max gain = strikes difference minus premium paid. Max loss is premium paid. |
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Debit Spreads Calls Max gain and Loss. |
Max gain = strikes difference minus premium paid. Max loss is premium paid. |
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Break even Debit Call spread call Up |
Add the premium to the lower call strike ( going up). |
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Credit Call spread Max Gain and Loss. |
Max gain is premium received. Max loss is the strike difference less the premium received. |
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Credit Call spread Max Gain and Loss. |
Max gain is premium received. Max loss is the strike difference less the premium received. |
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Credit Call spread Break even. |
The same as debit call spread. Add premium to lower strike. |
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Debit put spread Max gain and loss. |
Max gain is the difference of The strikes less premium paid. Max loss is premium paid. |
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Debit put spread Max gain and loss. |
Max gain is the difference of The strikes less premium paid. Max loss is premium paid. |
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Break even debit put spread. |
Subtract premium from Higher strike put ( down). |
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Debit put spread Max gain and loss. |
Max gain is the difference of The strikes less premium paid. Max loss is premium paid. |
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Break even debit put spread. |
Subtract premium from Higher strike put ( down). |
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Credit put spreads Max gain and loss. |
Max gain is premium received and Max loss is the difference in strikes less premium received. |
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Debit put spread Max gain and loss. |
Max gain is the difference of The strikes less premium paid. Max loss is premium paid. |
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Break even debit put spread. |
Subtract premium from Higher strike put ( down). |
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Credit put spreads Max gain and loss. |
Max gain is premium received and Max loss is the difference in strikes less premium received. |
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Break even credit put spreads |
Same as debit put spread. Subtract premium from the higher strike (down). |
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Covered Call writes. |
When you own underlying stock and sell a call for income. |
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Stock dividends |
The number of option contracts stays the same. The strike decreases. The number of shares per option contract increases. |
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Stock dividends |
The number of option contracts stays the same. The strike decreases. The number of shares per option contract increases. |
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Take Note Cash dividends |
Cash dividends do not affect listed options. |
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Stock dividends |
The number of option contracts stays the same. The strike decreases. The number of shares per option contract increases. |
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Take Note Cash dividends |
Cash dividends do not affect listed options. |
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Stock splits and options. Forward split. |
The number of options contracts Increases. The strike price decreases. The number of shares per contract stays the same. |
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Break even points for Long stock and Long Put |
If investor bought twice. Stock and puts, add premium to stock price for Breakeven. |
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Break even for short stock and short put. |
Add the premium to the stock price. |
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Break even for short stock and short put. |
Add the premium to the stock price. |
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Break even for 1 buy and 1 sell. Long stock short call or short stock long call. |
Break even is subtract premium from the stock. |
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Last trade day options |
3:02pm CST on the business day prior to expiration. |
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Last trade day options |
3:02pm CST on the business day prior to expiration. |
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Last exercise |
The last time an investor can exercise an option is 4:30pm CST on the business day prior to expiration. If the option is in the money by at least 1 point at expiration, it will be automatically exercised. |
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Last trade day options |
3:02pm CST on the business day prior to expiration. |
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Last exercise |
The last time an investor can exercise an option is 4:30pm CST on the business day prior to expiration. If the option is in the money by at least 1 point at expiration, it will be automatically exercised. |
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Option expiration |
Options expire @ 10:59pm CST on the Saturday after the third Friday of the expiration month. |
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Compliance Registered options principal CROP. |
A supervisory & compliance position that FINRA required of options trading firms until 2008. The CROP had to be a firm officer and was responsible for ensuring the firm's regulatory compliance for its options trading activities for clients accounts. Also monitors advertising. |
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Senior registered options principal SROP |
An officer or General Partner of options tarring firm who supervises options exposure and trading activity in clients accounts. Series 4 |
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Order book Official |
An employee of the CBOE who is responsible for maintaining a fair & orderly market in the options assigned to them and for executing orders that have been left to them. Direct employees of CBOE and can't trade for themselves. |
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Tax treatment of Options Long options |
A long option that has been exercised results in a capital gain or loss. One that has expired without exercise results in capital gain or loss. |
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Tax treatment of Options Long options |
A long option that has been exercised results in a capital gain or loss. One that has expired without exercise results in capital gain or loss. |
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Tax treatment of options. Short options |
A short option exercised also a results in capital gain or loss. Expired without exercise is. A cap gain. |
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Tax treatment of Options Long options |
A long option that has been exercised results in a capital gain or loss. One that has expired without exercise results in capital gain or loss. |
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Tax treatment of options. Short options |
A short option exercised also a results in capital gain or loss. Expired without exercise is. A cap gain. |
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Opening rotation options |
An order to buy or sell a security that is to remain active through the days opening trading rotation. Open rotation orders that are not filled automatically expire. |
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Married put |
An options strategy where the investor, holding a long stock position buys a put to protect against downside. It raises cost basis. This strategy creates a floor on downside risk while maintaining unlimited upside. Essentially a perpetual long call. |
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Bull spread calls and puts |
Buy the LOW strike & Sell the HIGH strike |
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Bull spread calls and puts |
Buy the LOW strike & Sell the HIGH strike |
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Bear spread calls and puts |
Buy the HIGH strike & Sell the LOW strike. |
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Vertical spread |
Different strikes. Same class. Same expiration. |
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Vertical spread |
Different strikes. Same class. Same expiration. |
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Horizontal or Calendar spreads |
Different expiration months. Same class. Same strike. |
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Diagonal spread |
Different strike & different expiration months.
Same class, puts or calls. |
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Take note Debit spreads |
Debit spreads will profit if the spread widens and both options exercise. |
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Take note Debit spreads |
Debit spreads will profit if the spread widens and both options exercise. |
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Take Note credit spreads |
Credits spread will profit when the spread narrows and the options are un exercised or expire. |
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Straddle profit |
The profit is the difference between market price and nearest Breakeven point. |
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Straddle profit |
The profit is the difference between market price and nearest Breakeven point. The profit area is outside the Breakeven points. |
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Straddle loss |
The loss is the difference between the market price and the nearest Breakeven points. Straddle losses are inside the Breakeven points. |
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Take note Stock splits and stock dividends |
They increase the number of shares and decrease the exercise price. |
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Take note strike prices. |
These are set by the exchanges not the OCC. |
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Exercise of options 1 |
When a customer wants to exercise a call or put, an EXERCISE NOTICE is sent to the OCC. OCC assigns the Exercise notice randomly selected member account that chooses which customer will be exercised. |
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Take note Stock splits and stock dividends |
They increase the number of shares and decrease the exercise price. |
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Take note strike prices. |
These are set by the exchanges not the OCC. |
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Exercise of options 1 |
When a customer wants to exercise a call or put, an EXERCISE NOTICE is sent to the OCC. OCC assigns the Exercise notice randomly selected member account that chooses which customer will be exercised. |
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Exercise of options 2 |
The member may select customer at random or use FIFO method or other way. OCC has the responsibility for guaranteeing a listed option. |
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Options settlement |
Purchases and sales of options clear next business Day. |
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Options settlement |
Purchases and sales of options clear next business Day. |
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Options exercise |
Options exercise clear the third business day after OCC receives the exercise notice. The trade date is the date the OCC receives the exercise notice. |
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Options settlement |
Purchases and sales of options clear next business Day. |
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Options exercise |
Options exercise clear the third business day after OCC receives the exercise notice. The trade date is the date the OCC receives the exercise notice. |
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Delivery of Options Disclosure document |
Must be given to ALL customers at or before the time the customer is approved to trade options. |
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FINRA and Options Disclosure documents |
FINRA rules also require firms to deliver a copy of each ODD supplement to customers who previously received the ODD supplement no later than the time at which customers get a confirmation of a transaction in the category of options to which the supplement exists. |
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Options portion limits |
Now 250,000 contracts. |
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Options portion limits |
Now 250,000 contracts. |
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Customer options agreement |
1) customer must abide by the rules of OCC. 2)the COA must be signed by customer and returned within 15 days after account approval. If not signed in time no new portions can be opened but existing can either close or remain. |
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Order Book Official |
They conduct the opening and closing rotations. |
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Opening rotation |
The O.B.O. Calls for bids & offers for each option series from the crowd. It is conducted as soon as underlying issues open their primary markets. |
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Opening rotation |
The O.B.O. Calls for bids & offers for each option series from the crowd. It is conducted as soon as underlying issues open their primary markets. |
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Closing rotation |
The O.B.O. Conducts the rotation to ensure a closing price for each option series. |
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T note and T bond options |
Exercise settlement is 2 business days after expiration notice is rendered. |
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T note and Bond option premiums |
Expressed as points and 1/32nd of 1% is unit of trading. Every full point = $1000 and each 1/32nd =31.25. |
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T note and Bond option premiums |
Expressed as points and 1/32nd of 1% is unit of trading. Every full point = $1000 and each 1/32nd =31.25. |
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T note premium example |
The premium is quoted 2.16 which is 2^16 or 2 and 16/32nds. Cash value = 2 times $1000 and 16/32nds of a $1000. Answer is $2500. |
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Take note Bond options |
If the investor expected rates to increase, he would buy puts because if rates increase, prices decrease. He would buy puts to protect or insure position or sell calls for income. |
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Foreign currency options |
Expire on the Saturday before the third Wednesday of expiration month. Settlement date of exercise will be the third Wednesday. Premiums expressed in US cents per foreign currency. |
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Currency options strategies Bullish on foreign economy. |
They might buy calls in its currency. |
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Currency options strategies Bullish on foreign economy. |
They might buy calls in its currency. |
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Currency strategies Bearish foreign economy |
The investor may buy puts in the foreign currency. |
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Currency strategy importers |
Buy currency. Buy calls or Sell puts. |
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Currency strategy importers |
Buy currency. Buy calls or Sell puts. |
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Currency strategy Exporters |
Exporters sell futures Buy puts or sell calls. |
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Take note Currency options premium |
It is expressed in US cents per unit of foreign currency. Example BP contract =£12,500. BP put with a premium of 130 = 12,500 times $1.30 = $16,250. BP call with premium of 4.50= 0.045 times 12,500= $562.50.
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Take note Currency premium 2 |
CD call premium = .40. CD contract cd $100,000. Premium = 0.004 times 100,000 which equals $400. |
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Action word Increases total return |
This means more income. Most likely selling calls. Remember puts are insurance or protection. |
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Take note Current options disclosure document. |
The customer must receive this AT or PRIOR the time that the customer's account is approved for options trading. |
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Take note Municipal bond put option |
The put option may be exercised at the discretion of the bondholder and doesn't need permission of the issuer. |
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Take note Municipal bond put option |
The put option may be exercised at the discretion of the bondholder and doesn't need permission of the issuer. |
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Take note Options exercise limits |
The exercise limits of options contracts refer to the fact that an individual or a group acting together may only exercise a certain number of contacts within 3 CONSECUTIVE BUSINESS DAYS. |
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Take note Options cycles and expiration length |
Although options cycles vary the maximum expiration length is 9 MONTHS. |
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Take note Options cycles and expiration length |
Although options cycles vary the maximum expiration length is 9 MONTHS. |
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Take note similar terms |
The phrase lowest dollar price of bonds is the same as the biggest discount. Therefore bond with the biggest discount will have the lowest dollar price. |
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For the purpose of option trading on foreign currencies, All exchange rates are quoted in : |
Options trading in foreign currency options all exchange rates are quoted in dollars. |
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Class of options |
Options of the same type either all calls or all puts that cover the same security. |
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Series of options |
A class of options having the same expiration and same exercise. |
