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21 Cards in this Set
- Front
- Back
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Call option |
Gives the owner the right to buy the asset |
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Put option |
Gives the owner right to sell the asset |
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Option |
A contract between two parties |
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Option writer |
The person who takes the other side of the contract (the opposite of the owner) |
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Exercising the option |
When a holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price |
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Strike/exercise price |
The price at which the holder buys or sells the share of stock when the option is exercised |
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American option |
The most common kind, allows holders to exercise the option at any date |
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Expiration date |
The final day of the option |
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European options |
Allows the holders to exercise the option only on the expiration date. |
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Option premium |
The market price of the option. |
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At-the-money |
When the exercise price of an option is equal to the current price of the stock |
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In-the-money |
If the payoff from exercising the option immediately is positive |
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Out-of-the-money |
If the payoff from exercising the option immediately is negative |
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Deep in-the-money or deep out of the money |
Options where the strike price and the stock price are very far apart |
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Hedging |
When an option is used to reduce risk |
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The value of the call option at expiration |
C = max(S-K,0) where S is the stock price, K is the exercise price |
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Put price at expiration |
P = max(K-S,0) where S is the stock price, K is the exercise price |
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Put-call parity |
C = P + S - PV (K) The relation ship between the value of the stock, the bond and call and put options |
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Put call parity in the case where a stock pays dividends |
C = P + S - PV(Div) - PV(K) |
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The intrinsic value of an option |
The value the option would have, if it expired immediately An american option cannot be worth less than its intrinsic value |
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The time value of an option |
The difference between the current option price and its intrinsic value |
