Calls - Options Flashcards
What is the Breakeven formula for Puts?
Exercise Price - Premium
Buy 1 XYZ OCT 30 PUT @4
30 - 4 = 26
Price has to drop to 2 to break even.
What is European-style Exercise?
Exercise can only take place at expiration (Expiration date of Option exercise price).
What movement of the stock’s price is the buyer of a call trying to participate in?
Call Buying - Reasons for Buying a CALL
Upward
CALL = UPWARD
What does the investor do when he has bought a call and the stock price goes up?
Buy the stock at the strike price and then sell it at a higher price in the market.
How it works:
A call option is a contract that gives the buyer the right to BUY shares of an underlying stock at the strike price.
He has a contract to buy the stock at the LOWER PRICE and he in turn sells it at the higher market price.
He makes money when the stock goes up and he buys at the lower strike price and resells it (at the higher Market price). All done before the expirations date.
[Buy at SP (which is lower and locked in then sell at a higher price). When he bought the Option it stated that he could sell at that price at any time before the expiration.]
What is the profit potential on a CALL option?
Call Buying - Reasons for Buying a CALL
Unlimited (upside) potential.
What is the Loss potential on a Call option?
Limited
Limited to of the Premium. If not favorable to exercise option you let it expire.
How does a Call option allow for leverage by the investor?
Instead of buying just one stock the investor could buy options for many stocks.
What does the Exercise Price of the option do in terms of the Market?
Secures future price in the market
What does a Long Call protect or hedge?
Hedges a short sale.
How? By performing the opposite on the position.
Buyer ^ call put v
Seller v call put ^
When investors buy a ________ as an opening purchase they will do one of the following:
1- Excercise the option and buy the stock
2- Close the position by selling the option contract to another investor
3- Let the option expire unexercised and lose the premium.
Buy a Call.
What is the chief monetary return Call Writing (Selling) is trying to achieve?
[Call Writing]
Premium Income
Call writing allows investors to receive Premium Income when a Neutral or Down Market is expected and would improve Rate of Return on their investments.
What strategy offers Premium income with Downside protection?
Covered Call Writing
What is the most Conservative option position possible?
Covered Call Writing
What is the most conservative call position for retired persons wanting to trade options?
Covered Call Writing
If an investor in an Option owned the underlying stock, what would he be considered?
Covered Call Writer
If an investor in an Option ovtains an Escrow or Depository Receipt fro a bank (certifying the stock in ist the bank and will be delivered if the call is exercised what is he considered to be called?
Covered Call Writer
If an investor was “long: a call with an equal or lower exercise price and the short call must expire at same time or before the long what is his position?
Covered Call Writer
What is the acronym for CALLS?
CALLS are COVERED if the LONG side of the position is the one that has the LOWER STRIKPRICE.
Short 1 ABC MAY 50 CALL
LONG 1 ABC MAY 40 CALL = Covered!
40 is LOWER than 50 = Covered
What is an investor considered when he owns Convertible Bonds, Preferred Stock, or Warrants which are immediately convertible of exchangeable for common stock and do not expire before the short call(s)?
Covered Call Writer
When an investor ____________ a Call the Option will be exercised and the investor will Sell the stock.
Sells a Call as an Opening Sale
When the writer will buy the option to close the position what is he called?
A Call Writer
When the option will expire unexercised and the writer keeps the premium what is he called?
A Call Writer
A ___________ allows an investor to participate in a downward movement of stock prices?
A Put
If the stock price goes down, the investor could buy the stock in the market and sell the stock at the set exercise price by exercising the __________?
Put
