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16 Cards in this Set
- Front
- Back
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Rules for Buyers and Sellers of Options
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Buyers pay the up-front premium and receive the right to exercise. Sellers receive the up-front preium and assume an obligation if exercised against
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A call option...
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gives the owner the right to buy the underlying security
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A put option...
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gives the owner the right to sell the underlying security
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When are the class of options the same? |
When the options are the same type and for the same underlying stock
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An options series...
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represents all options of the same class, with the same expiration date, and the same exercise price
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What is an uncovered option?
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An uncovered option is when the seller of a call does not own the underlying stock, so if exercised the seller would have to buy the stock at any price
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What formula makes up the option premium?
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Option Premium = Intrinsic Value + Time Value Time Value is determined by: Premium - Intrinsic Value |
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What are the the two types of option events?
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Liquidate, Trade, Closeout: An opposite transaction is executed to close out the option Exercise: The investor who is long the options set the option in motion |
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What are the two types of option exercises?
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American Style Option: Can be exercised up to the day they expire European Style Option: May be exercised at a specified point of time, typically day of expiration |
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Options Clearing Corporation (OCC) Guarantee
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Guarantees that options will be fulfilled, especially if someone is naked a call option |
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Buyers and Writers Perspectives
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An option buyer wants contracts to become in the money so they can exercise them for a profit. A seller's maximum profit is the premium received
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Buying Calls Breakdown
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Breakeven = strike price + premium paid Maximum Gain = unlimited Maximum Loss = Premium Paid |
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Buying Puts
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Breakeven = Strike price - premium paid Maximum Gain = Strike price - premium x 100 shares Maximum Loss = Premium Paid |
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Selling Calls
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Breakeven = strike price + premium received Maximum Gain = premium received Maximum Loss = unlimited |
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Selling Puts
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Breakeven = strike price - premium received Maximum Gain = premium received Maximum Loss = strike price - premium x 100 shares |
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What are bullish positions for options?
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Long Call (buying a call) or Short Put (selling a put)
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