1 - Intro to Options Market Flashcards Preview

Options Futures and Risk Management > 1 - Intro to Options Market > Flashcards

Flashcards in 1 - Intro to Options Market Deck (23):
1

who is the biggest user of options? what are three further users?

Retail markets

-individuals
-private businesses
-financial institutions

2

Why do people use options? (4 types)

risk management
-hedging
-speculation
-short selling
-leveraging opportunities

3

What are the features of an index option?

-option on market index
-cash settled on exercise
-used for hedging/speculating market trends

4

what are the features of an equity/share option?

-option on specific securities
-shared exchanged on exercise
-used for hedging/speculating individual stocks

5

What's the difference between a call and a put option?

Call
-right to buy

Put
-right to sell

6

Whats the difference between and American and a European option?

American
- right to buy/sell on or before expiration

European
- right to buy/sell on expiration date

7

What is the risk premium?

The cost to buy an option

8

what are three features of over-the-counter options?

-customised
-private transactions
-unregulated

9

what is meant by long and short positions?

long- you are the taker
short- you are the writer

10

when is an option at the money?

S=X

11

when is a call option in the money?
a put?

S>X
S

12

when is a call option out of the money?
a put?

SX

13

What is the intrinsic value?

the theoretical value of the option if the maturity date were today

14

how must a writer of an option ensure that they can deliver if exercised against?

-cover themselves (insurance)
-maintain margin to offset uncovered position

15

When does the writer pay taxes?

when they receive the premium

16

When does a taker pay tax?

- bought as a trading asset - losses deductible during yr they occur
- bought as a hedge - option fee can be deductible (purchased on revenue account)

17

Are ASX traded options American or European?

European

18

What are the main benefits of an index option? 3

- leverage (greater exposure to ASX)
- low trading costs
- exposed only to market risk

19

What benefit does a share option have over an index option?

If you sell the share option you can protect yourself from a decrease in the underlying asset.

20

What is the difference in a short call and a long put position?

shorting is selling something you don't own - you have the obligation to deliver the goods at pre-determined price if exercised against
long put gives you the right but not the obligation to sell at a pre-determined price on the exercise date.
writing call = premium up front
long put = paying premium up front

21

Why is an efficient market important to derivatives?

derivatives derive value from underlying asset - therefore its important that the underlying asset is correctly priced so that we can correctly value derivatives

22

What are four transaction costs of trading options?

-brokerage fees/comissions
-bid-ask spread
-admin fees (clearing house)
-exchange fee (ASX fee)

23

how is the tax treatment for the premium different for the writer and the taker of an option?

writer- receives premium - tax assessable
taker - pays premium - tax deductible