Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/42

Click to flip

42 Cards in this Set

  • Front
  • Back
What is a important point on risk management?
money spent on reducing risk is not wasted.

ex. ins. premium
What is a long position in the security?
Someone who owns shares of that stock
What is the breakeven on a long Stock position?
The purchase price, if the price remains unchanged for some time.
Why would an investor want a protective put?
They anticipate a decline in the stock price, but do not want to sell or cannot sell the long stock.
What is a protective put?
The simultaneous holding of a long stock position and a put option on that stock.
Buying a ______ ____ is very similar to the outright purchase of a _____ option.
protective put; call
synthetic option
a collection of financial instruments that are equivalent to an option position.
A protective put is an example of a .....
synthetic call

long stock + long Put=long call
What is a short sale?
the 1st transaction is the sale and the 2nd transaction is a purchase.
selling borrowed shares
What is "covering the short position"?
closing out a short position
What is a difference between a long put and a short sale?
in a long put the potential for unlimited losses is eliminated.
in buying a put the maximum loss is the premium.
what is one way to hedge the risk on a short sale?
add a long call position to the short stock position
short stock + long call=
long put
What is a covered call?
you are buying the underlying stock shares and selling call options against it.
On a covered call what is the maximum loss?
The stock price minus the option premium.
Why might a investor use a covered call?
To protect against a market downturn.
to generate income on a stock.
What is a risk of a covered call?
that the market price will rise and the stock will get called away.
What is the better hedge against a market downturn a covered call or a put option?
the put option.
what is the premium on writing a option?
compensation for bearing added risk or for forgoing future price appreciation.
What are the tax implications on option premiums?
If you buy an option and it expires worthless you have a capital loss.
If you write an option and it expires worthless you have a capital gain.
If an option gets exercised, the option premium alters the purchase or sale price of the underlying stock.
Explain this....
if you buy a call and exercise the premium is added to the stock price and the irs considers it the purchase price. If you write a call and its exercised the premium is added to the stock price and becomes the selling price.
When is not a good time to write a covered call?
when option premiums are very low.
is it a good idea to write a long term option to generate income?
no, it is better to write a series of short term.
How do brokerage firms discourage individual/small investors from writing naked options?
by enforcing certain minimum account balance requirements before permitting this type of speculative acivity.
writing puts is similar to ....
writing covered calls
A naked put usually means....
a short put by itself.
A covered put usually means...
the combination of a short put and a short stock position.
What is a fiduciary put?
writing a put option and simuiltaneosly deposit the strike price into a special escrow account.
How do options create contingent liabilities on the balance sheet?
When you write an option
Long stock + short call= ___

this equation creates p/l diagram identical to....
short put

covered call's are identical to short puts p/l diagrams.
Why are covered calls written more often then short puts?
ignorance about the merits of this strategy.
What is put overwriting?
involves owning shares of stock and simultaneously writing a put option against these shares.
What type of strategy is put overwriting?
it is a bullish strategy.
What is the largest possible gain when an investor writes an option?
the option premium.
What is the P/l equation on a put overwrite?
=(current price -purchase stock price) +option premium -(put strike price -current price)
What type of investor is put overwriting appropriate for?
a portfolio manager who needs to generate additional income but does not want to write calls for fear of opportunity losses in a bull market.
What is a protective put with a seasoned position?
You bought a stock and it has appreciated in value and you write a protective put to protect it against a decline in value.
What is a protective put with a seasoned position p/l equation?
=(spot price -stock price)+ (put strike - spot) -prem
Writing a covered call against an existing stock position. How is this diff from a covered call purchased with a stock.
the p/l shifts upward by the diff from the orig price and the current price.
why write deep-in-the-money calls?
you want to sell the shares but generate extra income and don't need the money from the sale of the shares right away.
What is a risk with trying to improve on the market with a deep in the money call?
that the stock price drops while your waiting for the option to expire.
Why write a deep in the money put?
you wish to buy the stock but not outright, so you write a deep in the money put and make the income from the premium and when the stock is exercised you buy the shares.