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25 Cards in this Set

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  • Back
What is an option?
a contract in which the writer of the option grants the buyer the right, but not the obligation, to purchase from or sell to the writer something at a specified price within a specified period of time
What is an option price or an option premium?
price of an option; the cost of the right to the buyer
What is the exercise price or strike price?
the price at which the underlying may be bought or sold
What is the expiration date or maturity date?
date after which an option is void
What is a call option or more simply a call?
when an option grants the buyer the right to purchase the underlying from the writer
What is a put option or more simply a put?
when the option buyer has the right to sell the underlying to the writer
What are American options?
options that may be exercised at any time up to and including the expiration date
What are European options?
options that must be exercised only at the expiration date
Where can options be traded?
1. on an organized exchange
2. over-the-counter market
What are the advantages of exchange-trade options over OTC options?
1. standardization of the exercise price, quantity of the underlying, expiration date of the contract
2. clearinghouse severs link between buyer and seller; no risk
3. transaction costs are lower
What are the differences between options and futures contracts?
1. in an option, one party is not obligated to transact at a later date; futures buyer does not pay seller to accept the obligations
2. options do not provide a symmetric risk/reward relationship; in futures contract, buyer realizes a dollar-for-dollar gain when the price of the futures contract increases
What is being long a call option?
buying a call option
What is being short a call option?
selling a call option
What is being long a put option?
buying a put option
What is being short a put option?
selling a put option
How does the time value of money complicate risk/rewards of options?
by paying an option price, the buyer foregoes earning interest on that income; also by not owning the underlying, the buyer of an option foregoes any interim cash flows (dividends) that he can reinvest
What are the benefits of hedging with futures contracts?
1. lock in a price, eliminates price risk; however, investor loses benefits from a favorable price move;
What are the different US Options Markets?
1. stock options- options on individual shares; stock index options- underlying is a stock index
What is the Options Clearing Corporation (OCC)?
established by the Chicago Board Options Exchange (CBOE) and American Stock Exchange; has issued, guaranteed, registered, cleared and settled all transactions involving listed options on all exchanges
What are Long-Term Equity Anticipation Securities?
for an individual stock and stock index, only the next 2 expiration months are traded on the exchange; consequently the longest time before expiration of a standard option is 6 months; LEAPS are option contracts designed to offer option contracts with longer maturities;
What are options as physicals?
an interest rate option whose underlying is a fixed-income instrument
What is a FLEX option?
an option contract with some terms that have been customized; customization is a result of wide range of portfolio strategy needs
What are the names of options that can be created in which the option can be exercised at several specified dates as well as the expiration date of the option?
1. limited exercise options
2. Bermuda options
3. Atlantic options
What are two types of exotic options?
1. alternative options (either-or option)- has a payoff which the best indepedent payoff of two distinct assets
2. outperformance options- payoff is based on the relative payoff of two assets at the expiration date
What is a futures option?
option on a futures contract, gives the buyer the right to buy from or sell to the writer a designated futures contract at a designated price at any time during the life of the option; benefits- unlike options on fixed-income securities, futures options on T-coupons do not require payments of accrued interest to be made, no delivery squeeze over asset because of large supply of futures contract (no price bid up); finding out the prices of bonds can be difficult whereas futures prices are readily available