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82 Cards in this Set
- Front
- Back
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What is a combination?
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A strategy in which you are simultaneously long or short options of different types.
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What is a long straddle?
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If you own both a put and a call with the same striking price, the same expiration date, on the same stock.
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What is a short straddle?
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If you write both a put and a call with the same striking price, the same expiration date, on the same stock.
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When is a long straddle profitable?
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When the price rises or falls substantially
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What is the B/E formula for the long straddle?
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on the right (call)
p/l=(x-strike) -1.2 -2.75 on the left (put) p/l=(strike-x) -2.75 -1.20 each b/e point is the amount of the premiums away ex. 30 + 2.95 & 30 - 2.95 |
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What is the worst outcome for a straddle buyer?
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when both options expire worthless. This happens when they expire at the money.
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When might someone buy a straddle?
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when they anticipate a sharp movement in the stock price but does not know which direction.
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What does a straddle writer want?
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Little movement in the stock price.
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What is the maximum gain for a short straddle?
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when the options finish at the money and worthless
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What are the maximum losses?
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On the call side unlimited because the short call is uncovered
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Writing straddles are popular with what group?
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SPECULATORS
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What is a Strangle?
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it is very similar to a straddle except the puts and calls have different striking prices.
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What is the motivation for buying a straddle?
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the speculator expects a sharp price movement either up or down.
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A strangle has _____ striking prices.
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2
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what is the most popular version of a long strangle?
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it involves buying a put with a lower striking price than the call you buy.
the p/l is similar to a long straddle but the maximum loss is smaller |
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What are the B/E points for a long strangle?
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the strike price +/- the two option premiums.
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What is the maximum profit in a short strangle?
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It has a broader range than a short straddle. If the options expire between the put strike and the call strike you earn the maximum (premiums)
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What is a condor?
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A less risky version of the strangle involving four different striking prices.
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How do you construct a long condor?
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you buy the outside striking prices and write the middle ones.
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The condor writer hopes the options will expire in what range?
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The middle between the two writes.
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How do you construct a short condor?
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you write the outside striking prices and buy the middle ones
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What is the condor writers motivation?
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the condor writer makes money when prices move sharply in either direction.
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What is the maximum gain with a condor?
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the premium
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What is a spread?
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a spread is an option strategy whereby you are simultaneously long and short options of the same type, but with different striking prices and or expirations.
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What is a vertical spread?
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An option strategy involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. also called price spread.
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On all spreads when do the maximum loss and gain occur?
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they occur at the striking prices so it is not necessary to consider stock prices outside this range.
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How do you construct a bullspread?
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buy the low striking price and write the high.
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How do you construct a bearspread?
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buy the high striking price and write the low.
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Vertical spreads with puts?
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same as vertical spreads but with puts
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How do you construct a vertical put bearspread?
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Short one put option at a lower strike price and long one put option at a higher strike price.
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How do you construct a vertical put bullspread?
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Long one put option and short another put option with a higher strike price.
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What is the maximum gain & loss for a vertical put bullspread?
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Maximum Loss: Limited to the difference between the two strike prices minus the net premium received for the position.
Maximum Gain: Limited to the net credit received for the spread. I.e. the premium receieved for the short option less the premium paid for the long option. |
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What is the primary difference between a vertical spread with a put or a call?
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the put spread results in a credit to the spreader's account
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What is a credit spread?
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The positive difference between the value of a sold option and of a bought option.
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What is a debit spread?
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The negative difference between the value of a sold option and of a bought option.
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What is a calendar spread?
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Calendar spreads are also known as time or horizontal spreads because they involve options with different expiration months.
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What is time decay?
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as time passes options decline in value if the price of the underlying asset does not change.
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What is a diagonal spread?
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involves options from diff expiration months and with diff striking prices
not common. |
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What is a butterfly spread?
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A long call butterfly spread consists of three legs with a total of four options: long one call with a lower strike, short two calls with a middle strike and long one call of a higher strike. All the calls have the same expiration, and the middle strike is halfway between the lower and the higher strikes.
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what is the investors motivation on a butterfly spread?
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the investor is betting that the underlying asset price will end up very close to its current price. neutral investor
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How do you calculate the b/e points on a butterfly?
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First Break-even Point = Lowest Strike (72) + Net Debit (.50) = 72.50
Second Break-even Point = Highest Strike (78) - Net Debit (.50) = 77.50 |
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How do calculate the max gain on a butterfly?
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Maximum Profit = Middle Strike (75) - Lower Strike (72) - Net Debit (.50) = 2.50
$2.50 x Number of Shares per Contract (100) = $250 less commissions |
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What is the max loss?
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the total of the premiums paid and received.
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What is a volatility spread?
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applies to a variety of options, designed to speculate on changes in the volatility of the market rather than the direction of the market.
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What is a ratio spread?
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involves an unequal number of puts and calls. A variation on the bullspreads and bearspreads. It has more short positions
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What is a ratio backspread?
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It has more long positions the opposite of a ratio spread.
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What is a hedge wrapper?
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A way to protect profits on a stock that has already appreciated. The outlook tends to be bullish with a chance of a temporary downturn.
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How do you construct a hedge wrapper?
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write a covered call (higher strike)otm and also buy a put(lower strike)otm.
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Calculations for Short Strangles are:
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Upper Break Even = Call Strike Price + Net Credit
Lower Break Even = Put Strike Price - Net Credit Max Profit = Net Credit = Total Premium Received |
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Calculations for Long Strangles are:
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Upper Break Even = Call Strike Price + Net Debit
Lower Break Even = Put Strike Price - Net Debit Max Risk = Net Debit = Cost of Position |
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What is a combination as it pertains to options?
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a strategy in which you are simultaneosly long or short options of different types.
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How is a long straddle formed?
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Buy a call and put at the same strike price on the same expiration
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Why would yopu buy a long straddle?
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Because you anticipate a sharp movement in the stock price but don't know which direction.
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How is a short straddle formed with options?
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Sell a call and a put at the same strike on the same expiration
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Why would you write a straddle?
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you anticipate little movement in nthe stock price.
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How is a long strangle formed with options?
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Buy a call and put at different striking prices with the same expiration
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Why would you buy a strangle?
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the investor anticipates a sharp movement in the stock price.
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How is a short strangle formed with options?
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write a call and put at different striking prices with the same expiration
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Why would you buy a short strangle?
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the investor anticipates little movement in the stock price. profit is realized if the stock price remains between the upper and lower break even points.
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How is a butterfly formed with options?
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2 longs on the outside and two identical shorts on the inside.
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Why would you construct a long butterfly?
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you can make a large profit if the stock price stays stagnant
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What is a ratio spread?
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a uneven amount of long and short options
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what is a call ratio spread?
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long call @ the lower strike & 2 short call @ the higher strike
call bullspread |
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What is the purpose of a call ratio spread?
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neutral strategy the market is near the lower striking price and you anticipate a rise but also feel there is potential for a near term downturn.
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what is a put ratio spread?
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a bearspread with the addition of extra short put position
you would buy puts at a higher strike and sell a greater number of puts at a lower strike |
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Why do a put ratio spread?
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a neutral strategy, with the shorts at the lower strike you anticipate a small increase in the stock price.
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What is a hedge wrapper?
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you hold the stock & buy a put (lower strike) & write a call (higher strike)
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What is a hedge wrappers purpose?
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the stock has appreciated already and you are locking in profits.
generating income with the otm call protecting profits with the put. |
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What is the b/e, max, min on a hedge wrapper?
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none you make money no matter what.
Max p/l=(strike-stock)-short prem +long prem Min p/l=(strike-stock)-short prem +long prem= |
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What is combined call writing?
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writing calls on a stock using more than 1 striking price.
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What is the purpose?
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covered call using more than 1 strike price.
compromise between income and further price appreciation. |
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What is a croos company spread?
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Used when you believe one stock is overpriced to another
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how is a cross company spread constructed?
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buy in the money call on stock thats underpriced
write an out of the money call on the same stock (bullspread) write an in the money call on the stock that is overpriced and buy an out of the money call on the stock. (bearspead) |
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When does a cross company spread become profitable?
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on the bullspread when the price rises above the b/e
on the bearspread when the price falls below the b/e |
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What is a margin?
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equity portion you provide
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What is the margin on long puts and calls?
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none you pay for them when you buy them.
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What is the margin requirement on short puts or calls?
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prem +0.20(stock price) -(otm amount)
or prem +0.10 (stock price) whichever is greater |
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Discuss your outlook for the market?
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Are you bullish bearish or neutral
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What should you use for bearspreads? bullspreads?
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use puts for bullspreads
use calls for bearspreads |
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The risk/reward ratio?
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it is the max g/max loss
higher is better |
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In evaluating spreads specify a limit price?
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specify the price your willing to write it at and buy it at or tell him the spread your willing to have
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What are the steps in the decision making process?
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1.learn the fundamentals
2.gather info 3. evaluate alternatives 4. make a decision |
