20: Options Market Flashcards
Call Option Definition
The right to buy an asset at a specified exercise price on or before a specified expiration date.
Premium Definition
The purchase price of an option.
Put Option Definition
The right to sell an asset at a specified exercise price on or before a specified expiration date.
In the Money Definition
An option whose exercise would result in profit.
Out of the Money Definition
An option whose exercise would result in losses.
At the Money Definition
An option where the exercise price is equal to the asset price.
American Option Definition
An option that can be exercised on or before the expiration date.
European Option Definition
An option that can only be exercised on the expiration date.
Protective Put Definition
A two-part investment consisting of:
1. The purchase of a stock, and,
2. Buying a put option that guarantees minimum profit equal to the put’s exercise price.
Covered Call Definition
A two-part investment consisting of:
1. The purchase of a stock, and,
2. Selling/writing a call option on that stock.
Straddle Definition
An investment strategy that is a combination of buying a put option and a call option on the same asset, each with the same exercise price and expiration date.
The goal is to profit from expected volatility.
Money Spread Definition
An investment strategy that involves buying 2+ call options or put options with the same expiration date but different exercise prices.
Time Spread Definition
An investment strategy that involves buying 2+ call options or put options with the same exercise price but different expiration dates.
Collar Definition
An options strategy that brackets the value of a portfolio between two bounds.
Put-Call Parity Theorem
Requires that the difference between the price of a call and the price of a put be equal to the difference between the price of a stock and the present value of the exercise price.
C - P = S - PV(X)
If the equality doesn’t hold there is opportunity for arbitrage.
