Flashcards in 1 - Intro to Options Market Deck (23):
who is the biggest user of options? what are three further users?
Why do people use options? (4 types)
What are the features of an index option?
-option on market index
-cash settled on exercise
-used for hedging/speculating market trends
what are the features of an equity/share option?
-option on specific securities
-shared exchanged on exercise
-used for hedging/speculating individual stocks
What's the difference between a call and a put option?
-right to buy
-right to sell
Whats the difference between and American and a European option?
- right to buy/sell on or before expiration
- right to buy/sell on expiration date
What is the risk premium?
The cost to buy an option
what are three features of over-the-counter options?
what is meant by long and short positions?
long- you are the taker
short- you are the writer
when is an option at the money?
when is a call option in the money?
when is a call option out of the money?
What is the intrinsic value?
the theoretical value of the option if the maturity date were today
how must a writer of an option ensure that they can deliver if exercised against?
-cover themselves (insurance)
-maintain margin to offset uncovered position
When does the writer pay taxes?
when they receive the premium
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)
Are ASX traded options American or European?
What are the main benefits of an index option? 3
- leverage (greater exposure to ASX)
- low trading costs
- exposed only to market risk
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.
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
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
What are four transaction costs of trading options?
-admin fees (clearing house)
-exchange fee (ASX fee)