Option Contracts 16% Flashcards Preview

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Flashcards in Option Contracts 16% Deck (88)
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Holder

-buyer of the option
-right to call or sell (put)

1

OCC

-Options Clearing Corp
-standardizes options contracts so they can trade on the exchange
-sets strike prices and expiration dates
-owned by the exchanges that trade optins

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Class of options

-consists of options of the same underlying security

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Series

options of the same class that also have the same expiration date

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Style

-exercise style of the option;
-American
-European

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Option Writer

-has a short position in the option.
-collects premium

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Expiration

-equity options expire on the Saturday following the third Friday of the month at 11:59 ET.
-The friday before expiration is the last trading day

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OTC Options

-negotiated options that trade OTC
-can be custom-designed to meet a portfolio's need at a specific time

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Call option

-100 shares per call

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Option Premium

-fluctuates with the price of the underlying security

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European style options

-can only be exercised during a specific time period, usually the last trading day before expiration

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American Style Contracts

-can be exercised anytime up to expiration

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Assignment

-when option holders want to exercise, they must notify their broker/dealer, who in turn notifies the OCC
-The OCC assigns a b/d with a short position in the security
-b/d notifies a customer with a short position in those options
-random assignment, usually first in first out, or any other way that is "fair and reasonable"

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LEAPS

-Long-term Equity Anticipation Participation Securities
-stock or index option with expiration dates 12 months out to 39 months
-conventional stocks are 9 months

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Premium =

Intrinsic value + Time Value

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Intrinsic Value

-when the price of the underlying security is higher(call)/lower(put) than the strike price
-called in the money

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Parity

an option is at parity with the underlying security only when the option (premium plus strike price) = current market price

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Time Value Calculation

Premium - intrinsic value

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Option Cycles

-Three Cycles
-Jan/Apr/July/Oct
-Feb/May/Aug/Nov
-Mar/June/Sept/Dec

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Actively Traded Options

Large Caps may have monthly and even weekly expiration dates

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Trade Orders

-the CBOE is the largest options exchange
-Equity options trade 9:30ET to 4:00ET
-settle next biz day
-cannot be purchased on margin

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Opening Transaction

-establishes a new options position or adds to an existing position
-opening purchase - establishes a long position in the options
-debit calls - debit to customer's account
-debit puts - debit to customer's account
-opening sell - establishes a short position in the options
- when you write puts and calls
- credit puts - credit to customers account
- credit calls - credit to customer accounts

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Closing Transaction

-reduces or closes out an existing options position
-long position is sold
-closing purchase - option writer buys back his short option position
-closing sell - long position is sold

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Notice of exercise from b/d due

5:30PM ET third friday

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When are options automatically excercised?

-OCC will automatically exercise expiring options that are in the money by $0.01 or more

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Debits and Credits

-Net Debit - represents a loss
-Net Credit - profit
-when you purchase an option or stock, you create a debit
-when you sell an option or stock, you create a debit

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Max Loss

a call holder can only lose the premium paid

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Max Gain

call holder is unlimited

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Breakeven Point

The strike price and premium equal the underlying security price

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Short Calls

-Uncovered calls and naked calls
-writer of the call