Chapter 15 (Options Markets) Flashcards
American Option
Can be exercised on or before its expiration.
At The Money
An option where the exercise price equals the asset price.
Call Option
The right to buy an asset at a specified exercise price on or before a specified expiration date.
Collar
An options strategy that brackets the value of a portfolio between two bounds. They would buy a put at the lower bounds and write a call at a higher price.
Covered Call
Writing a call on an asset together with buying the asset.
European Option
Can be exercised only at expiration.
Exercise Price
Price set for calling (buying) an asset or putting (selling) an asset.
In The Money
An option where exercise would generate a positive cash flow.
- For a call the current price of the stock is above the strike price.
- For a put that current price of the stock is below the strike price.
Out of The Money
An option which, if exercised, would produce a negative cash flow. Out-of-the-money options are therefore never exercised.
- For a call the current price of the stock is below the strike price.
- For a put that current price of the stock is above the strike price.
Premium
Purchase price of an option.
Protective Put
An asset combined with a put option that guarantees minimum proceeds equal to the put’s exercise price.
Put Option
The right to sell an asset at a specified exercise price on or before a specified expiration date.
Risk Management
Strategies to limit the risk of a portfolio.
Spread
A combination of two or more call options or put options on the same asset with differing exercise prices or times to expiration.
Straddle
A combination of a call and a put, each with the same exercise price and expiration date.
