Chapter 15 Flashcards
(39 cards)
What does a CALL Holder’s chart look like?
flat then goes up
What does a CALL Writer’s chart look like?
flat then goes down
What does a PUT Holder’s chart look like?
goes down then is flat
What does a PUT Writer’s chart look like?
goes up then is flat
What is a Futures CALL Option?
A right (not obligation) to buy a futures contract at a set price within a certain time
When does the value of a listed call option decrease?
- When the exercise price is higher
- As the contract nears maturity
- When the stock price goes down
When does the value of a listed put option decrease?
- When the exercise price is lower
- As the contract nears maturity
- When the stock price goes up
The WRITER of a PUT option agrees to …
buy shares at a set price if the option holder desires
A writer of a call option will want the value of the underlying asset to _______, and a buyer of a put option will want the value of the underlying asset to _______.
decrease , decrease
Each listed stock OPTION CONTRACT gives the holder the right to buy or sell _____ shares of stock
100
Exercise prices for listed stock options usually occur in increments of __ and bracket the current stock price
$5
What is the value of a call option at maturity?
max(0, Sₜ − X)
- Sₜ is the stock price at expiration
- X is the strike price
What is the profit formula for a call option at maturity?
max(−C₀, Sₜ − X − C₀)
- Sₜ = stock price at expiration
- X = strike price
- C₀ = call premium (purchase price)
Max loss is the call premium paid.
What is the value of a put option at maturity?
max(0, X − Sₜ)
- X is the strike price
- Sₜ is the stock price at expiration
What is the profit formula for a put option at maturity?
max(−P₀, X − Sₜ − P₀)
- X = strike price
- Sₜ = stock price at expiration
- P₀ = put premium (initial cost)
Max loss is the premium paid.
What does “in the money” mean?
An option where exercise would generate a positive cash flow…
What does “out of the money” mean?
An option where exercise would produce a negative cash flow.
These options are not exercised
What does “at the money” mean?
when the strike price equals the current asset price
What’s the difference between American and European options?
- European: can only be exercised ON the expiration date
- America: can be exercised ON OR BEFORE the expiration date
overall American is more valuable due to the flexibility
How long are the initial maturities of most exchange-traded options?
generally, less than 1 year
What are the advantages of exchange-traded options over OTC options?
- Easy and low-cost trading
- Anonymity of participants
- No counterparty credit risk concerns
When do exchange-traded stock options expire?
on the third Friday of the expiration month
What is the OCC (Option Clearing Corporation)?
It’s the clearinghouse for options trading, owned by the exchanges where options are traded
Why doesn’t an option holder need to post margin?
Because the most they can lose is the price they paid for the option
