CHAPTER 5 - OPTIONS Flashcards
(20 cards)
Options Clearing Corporation
OCC is primary options regulator, standardizes parts of the contract
Expiration of Contracts
11:59pm on the third Friday of the month
Typical quote look
L 2 XYZ Jan 60 Call @3
Contract Price Equation
Price = premium * 100 shares
Intrinsic Value
NEVER ZERO
Call = CMV - strike
Put = Strike - CMV
In the money = positive
At the money = CMV = strike
Out of the money = negative
IV is the same for both buyers AND sellers
Time value
Subjective on perception of underlying price
Time to expiration
Never negative
Part of them premium
Intrinsic value + Time Value = Premium
Time Value = Premium - IV
Breakeven Calc
Calls
BE = Strike (XP) + Premium
Puts
BE = Strike (XP) - Premium
Max Gains and Losses
Max gain and loss for calls are unlimited or premium
Max gain and loss for puts are usually premium or BE because that is when CMV is 0
Hedging
Long a position then want a long put
BE = Price paid for stock + Premium paid for option
Short a position then want a long call
BE = Price stock sold for - premium paid for option
Income
Covered Calls
Long a stock and selling calls
Uncovered Calls
Selling calls
Index Options
Similar to equity’s either on a full index or narrow industry specific
Same thing
No underlying security, seller pays the buyer the cash equal to the in the money amount when exercised
Per share of total value
IV is per share
BE is per share
Cost is total
gain is total
Settlement Times
Buyer pays premium next business day
Exercise Equities (ALL next business day):
- Long Call: Buyer pays cash
- Short Call: Seller obligated to sell shares
- Long Put: Deliver shares to writer
- Short Put: Obligated to shares
Index:
- Writer pays cash to the holder in amount of gain
- In the money based on closing value on day of exercise
European v American Options
Assume all are American
American - can be exercised anytime before expiration
European - exercised only on day of expiration
Order of Options Trading for Account
1 - Rep must have reasonable grounds that options are good for client
2 - Rep provides client with options disclosure
3 - Account must be approved for trading by registered options principal (ROP)
4 - Can start trading
5 - Within 15 days client needs to deliver signed agreement or else can open new options trades
Regulators
OCC
CBOE
OCC
Standardizes, guarantees the performance of options, issue options contracts, determines when new ones should be offered.
Assignment of Exercise Notices
OCC assigns exercise notices to BDs on a random basis
BDs assign exercise notices to short customers on random, FIFO, or any other fair method
Contract opening/closing
Opening Buy if you are buying and to close you do a closing sale
Opening Sale if you are writing and to close you do closing buy
When is a contract at parity?
When premium = intrinsic value
