Options Flashcards
(58 cards)
If a customer is long 10 call options with a delta of .60, which of the following would neutralize this position?
sell 6 futures
buy 30 put options with delta .3
Buy 60 futures
sell 30 put options with delta of .3
In order to neutralize an option position which is 60% as volatile as the underlying contract (delta = .60), it is necessary to use 60% as many futures contracts (10 option contracts x 60% = 6 futures contracts). To neutralize long calls it is necessary to short the futures, therefore sell 6 futures contracts. C and D wouldnt work because you get long delta instead of short
What is a Synthetic Short Call?
Short put and short futures/stock
What are synthetic positions designed to do?
To give an investor the same profit and loss potential as buying or selling the option.
What are the 6 basic types of Synthetic positions?
1) Synthetic long stocks
2) Synthetic short Stocks
3) Synthetic Long call
4) Synthetic short call
5) Synthetic long puts
6) Synthetic short puts
What is a Synthetic Long Stock
Long Call + Short Put
What is a Synthetic Short Stock
Short call + Long Put
What is a Synthetic Long Call
Long put + long stock/futures
What is a Synthetic Long Put
Long Call + short stock/futures
What is a Synthetic Short Put
Short Call + Long stock/futures
T-Bill options are quoted in ______. And each ____ is worth $____
Basis points,
Bp
$25
A customer sells a T-bill call at 1.50. The dollar amount of the premium he receives is:
T-bill options are quoted in Bps. A quote on a tbill of 1.50 represents 150bps. if each bp is worth $25 the premium would be $3,750
(150x25x3750)
Explain a butterfly Spread
A butterfly spread is created using call options that have three different strike prices.
(1) long one contract at the lower strike price
(2) Short two contracts at the middle strike price.
(3) Long one contract at the higher strike price
Remember the 1-2-1 construction.
what is intrinsic Value?
The amount by which the option is ITM.
A speculator has purchased a call and a put on the same underlying futures contract. This is called a:
Long straddle
What needs to be included on commodity options confirmation statement?
1) Customer account ID number
2) A separate listing of the amount of the premium and all other commissions
3) The options series
4) the expiration date
What is the equation to determine the number of options contracts needed to hedge futures (assuming Delta mismatch)?
Ex: A farmer needs 50 futures contracts to hedge this year’s crops. To hedge, the farmer wants to use puts, instead of futures contracts. If the puts have a delta of 40% (.40), how many put contracts are needed to effectively hedge?
Divide the number of required futures by the options delta.
This farmer will need 125 put options (50 futures contracts/.40 delta). Notice that if the delta was smaller, the farmer would need even more puts and, if the delta was larger, fewer puts would be needed.
If a customer is long 10 call options with a delta of .40, which of the following would neutralize this position?
Sell 4 futures contracts
In order to neutralize an option position which is 40% as volatile as the underlying contract (delta = .40), it is necessary to use 40% as many futures contracts (10 option contracts x 40% = 4 futures contracts). To neutralize long calls it is necessary to short the futures, therefore sell 4 futures contracts.
Buyer of an option pays a premium, aka a____
Debit. and right to buy or sell futers
A seller of an option receivers a premium aka a ____
credit
When are Calls in the money?
When the Market price is higher than the strike
When are puts in the money
When the Market price is lower than the strike
Intrinsic value is aka what?
the in the money amount?
Options Dont have intrinsic value if they are not ITM
Premium =
Intrinsic value + Time value
Intrinsic value is ONLY created if the options is what?
In the money
if out of the money the option has 0 intrinsic value
