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T.C. - Study Deck(s) > Calls - Options > Flashcards

Calls - Options Flashcards

1
Q

What is the Breakeven formula for Puts?

A

Exercise Price - Premium
Buy 1 XYZ OCT 30 PUT @4
30 - 4 = 26
Price has to drop to 2 to break even.

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2
Q

What is European-style Exercise?

A

Exercise can only take place at expiration (Expiration date of Option exercise price).

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3
Q

What movement of the stock’s price is the buyer of a call trying to participate in?
Call Buying - Reasons for Buying a CALL

A

Upward

CALL = UPWARD

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4
Q

What does the investor do when he has bought a call and the stock price goes up?

A

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.]

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5
Q

What is the profit potential on a CALL option?

Call Buying - Reasons for Buying a CALL

A

Unlimited (upside) potential.

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6
Q

What is the Loss potential on a Call option?

A

Limited

Limited to of the Premium. If not favorable to exercise option you let it expire.

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7
Q

How does a Call option allow for leverage by the investor?

A

Instead of buying just one stock the investor could buy options for many stocks.

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8
Q

What does the Exercise Price of the option do in terms of the Market?

A

Secures future price in the market

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9
Q

What does a Long Call protect or hedge?

A

Hedges a short sale.
How? By performing the opposite on the position.

Buyer ^ call put v

Seller v call put ^

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10
Q

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.

A

Buy a Call.

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11
Q

What is the chief monetary return Call Writing (Selling) is trying to achieve?

[Call Writing]

A

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.

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12
Q

What strategy offers Premium income with Downside protection?

A

Covered Call Writing

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13
Q

What is the most Conservative option position possible?

A

Covered Call Writing

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14
Q

What is the most conservative call position for retired persons wanting to trade options?

A

Covered Call Writing

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15
Q

If an investor in an Option owned the underlying stock, what would he be considered?

A

Covered Call Writer

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16
Q

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?

A

Covered Call Writer

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17
Q

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?

A

Covered Call Writer

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18
Q

What is the acronym for CALLS?

A

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

19
Q

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)?

A

Covered Call Writer

20
Q

When an investor ____________ a Call the Option will be exercised and the investor will Sell the stock.

A

Sells a Call as an Opening Sale

21
Q

When the writer will buy the option to close the position what is he called?

A

A Call Writer

22
Q

When the option will expire unexercised and the writer keeps the premium what is he called?

A

A Call Writer

23
Q

A ___________ allows an investor to participate in a downward movement of stock prices?

A

A Put

24
Q

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 __________?

A

Put

25
Q

Which action protects (hedges) a Long stock position,

a Call or a Put?

A

Put

26
Q

______________ is a limited-risk alternative to selling stock short?

A

Put buying

27
Q

What action allow the investor to have a smaller capital commitment (less cost) as compared to selling the stock short with the same or greater potential gain?

A

Put buying

28
Q

The amount of money required as a deposit to sell short 100 shares of stock will normally be higher than the premium for buying more that one what?

A

Put

29
Q

When investors buy a ______________, they will exercise the option and sell the stock?

A

Buy a Put

30
Q

___________ Close the position by selling the Option to another investor?

A

Buy a Put as an opening position

31
Q

______________ let the option expire unexercised and lose the premium paid.

A

Put

32
Q

____________ writing allows the investor to make premium income when a neutral or upward market is expected which would improve the rate of return on investments.

A

Put Writing

33
Q

___________ allows investors to make premium income when a neutral or upward market is expected which would improve the rate of return on investments?

A

Writing (Selling) a Put

34
Q

What is an investor called (his position) if he has funds equal to the aggregate exercise price on deposit?

A

Covered Put Writer

35
Q

A ___________ obtained a bank guarantee letter from an approved bank stating that the bank will guarantee the investor that the money they need to buy the stock if the option is exercised?

A

Covered Put Writer

36
Q

A _________________ is considered covered if the are short an equal amount of the stock they world be obligated to buy

A

Covered Put Writer

37
Q

A ___________ is considered covered if the are long a put with an equal or greater exercise price and the short put must expire at the same time or before the long?

A

Covered Put Writer

38
Q

As regards the B/D why do Put writers want to be covered against?

A

Avoid the Margin requirements when writing uncovered.

39
Q

How does uncovered Put Writing offer the investor limited loss potential?

A

Strike price less the premium??????

40
Q

Investors should not sell/write uncovered puts in what kind of market?

A

Bear market

41
Q

What is the possible action when the option will be exercised and the investor will buy the stock?

A

Investor Sells a Put as an Opening Sale

42
Q

What is the action when a _______ writer will buy the option to close the position?

A

Sells a Put as an opening sale

43
Q

The Option will expire unexercised and the writer keeps the premium?

A

Sells a Put as an opening sale

T.C. - Study Deck(s) (8 decks)

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