Midterm 2 Flashcards
(33 cards)
Call Option
Strike Price / Exercise Price
Put Option
Real Options
Real investments tend to have embeded options
-abandon sour investments
-expand good investments
Holder
Buyer of option
-paid a premium
-has the right to decide whether to call or put
Writer
Seller of option
-received the premium
-has no choice if the option is exercised
Call Holder
Bought the right to buy
Call writer
sold the right to buy
Put writer
Sold the right to sell
Put holder
Bought the right to sell
Long underlying
Short underlying
Long Call
Short call
Long Put
Short Put
If the underlying is more volatile, what happens to the value of the option?
It increases
OTC vs Exchange traded options
-specs
-security (collateral)
-counter-party risk
-liquidity risk
Open Interest
The number of contracts outstanding
-when two parties enter the two sides of an option, a contract is created (+1 Open Interest)
-If one party closes and another party takes over the position, the OI remains the same
-When two parties close both sides of a contract (-1 Open Interest)
In the Money
option holder likely to exercise
At the Money
option holder may or may not exercise
Out of the money
option is not likely to be exercised
Covered Call
Protective Put
