DERIVATIVES AND OPTIONS

Question 1

CALL

Answer 1

Option granting the right to buy an asset at a set price before expiry.

Question 2

PUT

Answer 2

Option granting the right to sell an asset at a set price before expiry.

Question 3

OTM

Answer 3

Out-of-the-Money: option whose strike is less favorable than the market price.

Question 4

ATM

Answer 4

At-the-Money: option whose strike price equals (or is very close to) the current market price.

Question 5

ITM

Answer 5

In-the-Money: option whose strike price is favorable relative to the market price.

Question 6

IV

Answer 6

Implied Volatility: market’s forecast of an asset’s volatility implied by option prices.

Question 7

Delta (Δ)

Answer 7

Rate of option price change for a $1 move in the underlying.

Question 8

Gamma (Γ)

Answer 8

Rate of change in delta for a $1 move in the underlying.

Question 9

Theta (Θ)

Answer 9

Time decay: rate at which option value falls as it approaches expiry.

Question 10

Vega

Answer 10

Sensitivity of option price to a 1% change in implied volatility.

Question 11

Rho (ρ)

Answer 11

Sensitivity of option price to a 1% change in interest rates.

Question 12

LEAPS

Answer 12

Long-Term Equity Anticipation Securities: options with expiries > one year.

Question 13

FWD

Answer 13

Forward Contract: customized OTC agreement to buy/sell at a future date and price.