Options

Question 1

Reading an Option

Answer 1

1. Buying or Selling
2. Contract Size (one option = 100 shares of underlying stock)
3. Name of the stock
4. Expiration month for the option
5. Strike price
6. They type of Option
7. The premium

Question 2

Options Expiration

Answer 2

• Initial expiration is typically 9 mo.
• Options expire at 4 p.m. EST (3 p.m. CST) on the third Friday of the expiration month.

Question 3

Call Options

Answer 3

A call option gives the holder (owner) the right to buy 100 shares of a security at a fixed price and the seller the obligation to sell the stock at the fixed price.

Owners of call options want price to rise.

Sellers of options want price to drop.

Answer 4

The holder of a put option has the right to sell 100 shares of a security at a fixed price, and the writer (seller) of a put option has the obligation to buy the stock if exercised.

Buyers want stock to decrease

Seller want stock to increase

Question 5

Option - “is in the money”

Answer 5

exercising the option lets investors sell a security for more than its current market value or purchase it for less — a pretty good deal.

Don’t take the cost of the option (the premium) into consideration when determining whether an option is in-the-money or out-of-the-money. Having an option that’s in-the-money is not the same as making a profit.

Question 6

Intrinsic Value

Answer 6

The intrinsic value of an option is the amount that the option is in-the-money

Question 7

Options - “out of the money”

Answer 7

exercising the option means investors can’t get the best prices; they’d have to buy the security for more than its market value or sell it for less.

Don’t exercise

Question 8

Options - “at the money”

Answer 8

When the strike price is the same as the market price, the option is at-the-money; this is true whether the option is a call or a put.

Question 9

Premium of an Option

Answer 9

The premium of an option is the amount that the purchaser pays for the option. The premium may increase or decrease depending on whether an option goes in- or out-of-the-money, gets closer to expiration, and so on. The premium is made up of many different factors

Question 10

Calls Same

Answer 10

Add the Strike Price to the Premium to calculate the Break Even Point

Question 11

Puts Switch

Answer 11

Place the Premium and the Strike Price on opposite sides.

Question 12

Breakeven Point

Answer 12

Always the same for buyers and sellers

Question 13

Opening Purchase

Answer 13

Opening purchase: An opening purchase occurs when an investor first buys a call or a put.

Question 14

Opening Sale

Answer 14

Opening sale: An opening sale is when an investor first sells a call or a put.

Question 15

Closing Purchase

Answer 15

A closing purchase occurs when an investor buys herself out of a previous option position that she sold.

Question 16

Closing Sale

Answer 16

A closing sale occurs when an investor sells herself out of a previous option position that she purchased.

Question 17

Options Clearing Corporation (OCC)

Answer 17

The Options Clearing Corporation (OCC) is the issuer and guarantor of all listed options. The OCC decides which options will trade and their strike prices. In addition, when an investor decides to exercise her option, it’s the OCC that randomly decides which firm on the other end will be responsible for fulfilling the terms of the option.

Question 18

Options Risk Disclosure Statement

Answer 18

all investors must receive an options risk disclosure document (ODD or sometimes called an options disclosure document) before their first options transaction.

Question 19

Registered Options Principal

Answer 19

Because of the extra risk of investing in options, all new accounts and option order tickets must be approved and signed by a registered options principal (ROP), which is a manager with a Series 4 license. The registered options principal determines the amount of risk that each investor can take.

Question 20

Options Account Agreement (OAA)

Answer 20

Within 15 days after approval of the account by an ROP, the customer must sign and return an options account agreement (OAA, sometimes just called an options agreement). Basically, the OAA just states that the customer has read the ODD, understands the risk associated with trading options, and will abide by the rules and regulations regarding options trading.

Question 21

Covered Position - Options Selling

Answer 21

The seller of a call option is considered covered if he owns the underlying security or owns an option on the same security with the same or longer expiration that will be in-the-money first.

Question 22

Uncovered (Naked) - Options Selling

Answer 22

uncovered (naked) position is when the seller owns neither the underlying stock nor an option on the same security that will be in-the-money first with an equal or longer expiration date.

Question 23

Last Trade

Answer 23

The last time an investor can trade an option is 4:00 p.m. EST on the business day of expiration.

Question 24

Last Excercise

Answer 24

The last time an investor can exercise an option is 5:30 p.m. EST on the business day of expiration. If an option is in-the-money by at least 1 point at expiration, it will be automatically exercised. A vast majority of options (all equity [single-stock] and exchange-traded fund options) can be exercised any time up till expiration — this is known as American style.

Question 25

Option Expiration

Answer 25

Options expire at 11:59 p.m. EST on the third Friday of the expiration month.

Question 26

Option Exercised

Answer 26

Stock trades settle in two business days, so exercises of options settle in two business days. However, trades of options settle in one business day.

Question 27

Aggregate Exercise Price

Answer 27

The exercise (strike) price of an option multiplied by the number of units (usually shares) of the underlying security covered by the option contract (usually 100 shares).

Question 28

Clearing Member

Answer 28

A FINRA member that has been admitted to membership in the OCC (Options Clearing Corporation).

Question 29

Closing Sale Transaction

Answer 29

An option transaction in which the seller wants to reduce or eliminate a long position.

Question 30

Conventional Index Option

Answer 30

An option that overlies a basket (nine or more equity securities) or index of securities providing that no one security comprises more than 30 percent of the basket or index.

Question 31

Conventional Option

Answer 31

(A) Any option contract not issued or subject to issuance by the OCC, or (B) an OCC-cleared OTC option.

Question 32

Delta Neutral

Answer 32

An equity options position that has been fully hedged. For example, owning 100 shares of ABC stock and owning an at-the-money put on ABC stock. Basically, offsetting long and short positions.

Question 33

Net Delta

Answer 33

The number of shares that must be maintained (either long or short) to offset the risk the investor is facing having an equity option position.

Question 34

Opening Writing (opening sale)Transaction

Answer 34

The initial sale of an option in which the seller receives the premium paid.

Question 35

Outstanding

Answer 35

An option contract that has been neither closed (closing sale) nor exercised, and has not reached the expiration date.

Question 36

Series of Options

Answer 36

All option contracts that are of the same class, same expiration date, and same exercise price, and cover the same number of units of the underlying security or index.

Question 37

Type of Option

Answer 37

Put, or Call