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22 Cards in this Set
- Front
- Back
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Why does a person buy a long straddle?
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They anticipate there will be a lot of movement in the security but they are unsure which direction it will go
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How do you find the breakeven point for a call on a long straddle?
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Strike price plus the total premium (for a put it is strike price minus the total premium)
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Why does someone purchase a short straddle?
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They aren't bullish or bearish but just think the stock won't move much
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Where does someone who purchased a short straddle want stocks to stay to maximize their money?
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They want the options to expire at the money
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What is a combination?
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A straddle position with contracts that have different exercise prices and/or different expiration months
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What does an investor do when they leg out?
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An investor who has purchased a straddle but then sells one position is legging out
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What is the difference between a spread and a straddle?
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In a straddle the same action is made (call/put) while a spread has opposite actions
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What are the differences between a price spread, a time spread and a diagonal spread?
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A price spread is when the prices are different (also called a vertical spread), a time spread is when the expiration months are different (horizontal spread), a diagonal spread is when both are different
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Difference between a Net Debit and Net Credit Spread |
In a net debit spread more money is paid out than taken in, vice versa for net credit
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Rules for a Net Debit Spread
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When the dominant leg is the buy leg it is a net debit spread. The buyer wants the spread to widen, the breakeven is the dominant leg + the premium. The maximum gain is the difference between the strike price minus the net premium paid. Max loss is the premium paid
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Rules for Net Credit Spread
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The sell leg is dominant, seller wants the spread to narrow, breakeven is dominant leg - net premium. Max gain is the premium net premium received, The max loss is Stike price - net premum
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Spread Strategy Rules
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When a spread example does not have indicated premiums, the lower the strike price of the call spread the higher the premium, higher teh strike price of a put spread, higher the premium
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When working with vertical spreads:
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Identify the dominant leg - the option with the larger premium. For calls this will be lower strike price, for puts this will be higher strike price. Calculate the net premium: for buyer this is maximum loss, for seller this is maximum gain Determine breakeven point. For Calls, strike price plus net premium, for puts, strike price minus net premium |
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If you are long stock what is your hedging strategy?
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Buy a Put to provide the right to sell and protect downside risk
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A Long Stock + Long Put is called a...
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Protective Put and is used to limit the potential loss when a stock declines
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A Short Stock + Long Call is called a...
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Protective call and is purchased to protect against a possible increase in the market value of a stock that has been sold short
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Why is hedging with options better than stop orders?
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Stop orders are free, but once engaged they happen automatically regardless of price. If the market opens and a stop option is engaged, the price of the stock could change very dramatically and more money could be lost
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A Long Stock + Short Call (covered call) is used to...
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generate income. The option is being used as income, and if the stock rises the maximum gain is limited but a decline in stock is not protected
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What is ratio writing?
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Taking a long stock position with an unequal number of calls against it. For instance, Buy 100 shares of XYZ stock at $78 and sell 2 XYZ October 80 calls for a combined premium of 8. The second call may be uncovered but the premium made will double
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Short Stock + Short Put
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The investors sell shorts on stock and buys a put that limits the gain if the stock begins to fall. The investor makes the premium
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Writing Uncovered Calls |
Breakeven: Strike price + premium Stategy: Bearish Maximum Gain: Premium Maximum Loss: Unlimited |
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Writing Uncovered Puts
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Breakeven: Strike Price - Premium Strategy: Bullish Maximum Gain: Premium Maximum Loss: Strike Price - Premium (x 100 shares) |
