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Options Flashcards

Learning everything about options (78 cards)

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1
Q

Long Call

A

Allows the options holder (buyer) to buy 100 shares (typically) at the strike price up to the defined expiration date.

Said to Be LONG the call.

Bullish

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2
Q

Long Put

A

Allows the option holder to sell 100 shares (typically) at the strike price up to the defined expiration date.

Said to be LONG the put.

Bearish

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3
Q

Short Call

A

Obligate the option writer (seller) to sell 100 shares (typically_ of the underlying at the strike price when exercised.

Said to be SHORT the call.

Bearish

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4
Q

Short Put

A

Obligate the option writer (seller) to buy 100 shares (typically) of the underlying at the strike price when exercised.

Said to be SHORT the put.

Bullish

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5
Q

Margin Call Price

A

The margin call price represents the price below which the margin requirements are not met, and the investor must deposit more money or sell off a certain amount of portfolio holdings to return to compliance with the requirements.

((1 - Initial Margin) / (1 - maintenance margin)) x initial purchase price

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6
Q

Margin

A

The process of pledging securities in your brokerage account for a loan from your brokerage firm.

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7
Q

In the Money

A

The value is created when there is a favorable difference between the stock’s market price and the contract’s exercise price.
For a call favorable difference is when MP > EP Like CoME.
For a put favorable difference is when MP < EP. Like a PoEM

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8
Q

Intrinsic Value

A

One of two basic variables that determine an option’s price. This reflects the amount by which the option is in the money. This is made up of:
- The market price of the underlying stock and
- The exercise price of the option contract.

Delayed start options have no intrinsic value before the exercise price is set.

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9
Q

Time Premium or Time Value

A

One of the two basic variables that determine an option’s price. This is the part of the premium that reflects the time remaining before expiration. Whatever the premium of the option is in addition to its intrinsic value.

This is made up of:
- Risk-free rate of return
- Time to expiration
- Variability of the underlying stock (as measured by standard deviation)

The greater these variables, the greater the time premium which is greatest at the creation of the contract and approaches $0 at the expiration of the contract.

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10
Q

Covered Call Writing

A

If the writer of a physical delivery call option owns or acquires the amount of the underlying interest that is deliverable upon exercise of the call.

Long the underlying stock - short the call.
- Only considered covered if you own enough shares to cover all contracts sold.
- Used to generate income for the portfolio.

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11
Q

Naked Call Writing

A

Does not own the underlying stock - short the call
- Writer bears unlimited Risk.

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12
Q

Protective Put

A

Long the stock - long the put
- This is the very essence of portfolio insurance.

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13
Q

Protective Call

A

Short the stock - long the call
- Used to protect a short position in the stock.

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14
Q

Covered Put

A

Short the stock - short the put
- Writer uses the stock put to cover their short stock position

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15
Q

Collar (Zero-cost collar)

A

Long the stock - long the put - short the call
- The put is used to protect against a stock price decrease and the call premium is used to offset the cost of the put.

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16
Q

Straddle

A

Long a put and a call on the same underlying stock with the same expiration date and strike price.
- Used to capitalize on volatility regardless of the direction.

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17
Q

Spread

A

Involves purchasing and selling the same type of contract.
- Benefit from stability.

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18
Q

Extrinsic Value

A

The extra value associated with a contract based on time left to expiration, or the market’s assumption of where the stock might go. The latter is known as implied volatility

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19
Q

Physical Delivery Option

A

Gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put), of the underlying interest when the option is exercised.

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20
Q

Cash-Settled Option

A

It gives its owner the right to receive a cash payment based on the difference between a determined value of the underlying interest at the time the option is exercised and the fixed exercise price of the option.

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21
Q

Cash-Settled Call

A

Conveys the right to receive a cash payment if the determined value of the underlying interest at exercise exceeds the exercise price of the option.

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22
Q

Exercise Settlement Value

A

The value of the underlying interest at exercise.

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23
Q

Cash-Settled Put

A

Conveys the right to receive a cash payment if the exercise settlement value is less than the exercise price of the option.

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24
Q

Underlying Interests

A

The Markets that options are traded on. 4 Types
Equity Securities
Indexes
Debt Securities and Credit Events
Foreign Currencies

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25
Option Series
Options that have the same standardized terms are identical.
26
Multiply-Traded Options
Options of the same series may be traded on more than one options market.
27
Option Holder
The person who buys the right conveyed by the option.
28
Option Writer
The person that is obligated, if and when assigned an exercise, to perform according to the terms of the option. Sometimes referred to as the option seller.
29
Assigned Writer
An option writer who has been assigned an exercise.
30
Exercise Price
Sometimes called the strike price, this is the price at which the option holder has the right either to purchase or to sell the underlying interest.
31
Expiration Date
The date on which the option expires. If an option has not been exercised prior to its expiration, it ceases to exist - That is, the option holder no longer has any rights, and the option no longer has any value.
32
American-style
Other than the delayed start option, this option may be exercised at any time prior to its expiration. An American-style delayed start option may be exercised at any time after its exercise price is set and before its expiration date.
33
European-Style
Options that may be exercised only during a specified period before the option expires.
34
Capped Option
These options are automatically exercised prior to expiration if the options market on which the option is trading determines that the value of the underlying interest at a specified time on a trading day "hits the cap price" for the option. Capped options may also be exercised during a specified period before expiration.
35
Binary Option
A cash-settled option has only two possible payoff outcomes - either a fixed amount or nothing at all. It can be binary stock options or binary index options. Binary options are all subject to automatic exercise if the value of the underlying interest as of the time specified by the applicable listing options marker meets the criteria for automatic exercise as specified in the rules of the listing options market. If the criteria are not met, the option will expire worthless.
36
Binary stock options
Binary options on individual equity securities, including fund shares.
37
Binary Index Options
Binary options on broad-based securities indexes (including volatility indexes)
38
Range Option
A European-style, cash-settled option that has a payout if the value of the underlying interest falls within a specific range of values (the range length) at expiration. These are of a single type rather than consisting of puts and calls.
39
Unit of Trading; Contract Size (Physical Delivery)
For a physical delivery option is the amount of the underlying interest that is subject to being purchased or sold upon the exercise of a single option contract. The unit of trading for most options on equity securities is 100 shares.
40
Unit of Trading; Contract Size (Cash-Settled Option)
For a cash-settled option other than a binary option or a range option is determined by the multiplier that is fixed by the options market on which the options series is traded.
41
Unit of Trading; Contract Size (Range Option)
Determined by the option's multiplier and its maximum range exercise value.
42
Unit of Trading; Contract Size (Binary Option)
The cash settlement amount, which is fixed by the options market for any series of binary options at or before the opening of trading in that series.
43
Exercise
If the holder of a physical delivery options wishes to buy or sell the underlying interest at the exercise price - or in the case of a cash-settled option, receive the cash settlement amount - the option must be exercised. Exercise must happen according to brokerage firm's procedures.
44
Cash Settlement Amount,
The cash settlement amount is the amount of cash that the holder of a cash-settled option is entitled to receive upon exercise. In the case of a cash-settled option other than a binary option or a range option, it is the amount by which the exercise settlement value of the underlying interest of a cash-settled call exceeds the exercise price or the amount by which the exercise price of a cash-settled put exceeds the exercise settlement value of the underlying interest, multiplied by the multiplier for that option.
45
Settlement Currency
The settlement currency for all cash-settled options with standardized terms is US Dollars
46
Adjustments
Changes to some of the standardized terms of outstanding options upon the occurrence of certain events related to the underlying security. Determined by the OCC.
47
Premium
The price that the holder of an option pays and the writer of an option receives for the rights conveyed by the option. This is not a standardized term of the option. The premium is not a down payment.
48
Opening Transaction
This is a purchase or sale transaction by which a person establishes or increases a position as either the holder or the writer of an option.
49
Closing Transaction
A transaction in which, at some point prior to the expiration, the option holder makes an offsetting sale of an identical option, or the option writer makes an offsetting purchase of an identical option. This reduces or cancels out an investor's previous position as the holder or the writer of that option.
50
Position Limits
The rules of options markets generally limit the maximum number of options on the same side of the market with respect to a single underlying interest that may be carried in the accounts of a single investor.
51
Combinations
Positions in more than one option at the same time.
52
Spreads
A combination type that involves being both the buyer and writer of the same type of option on the same underlying interest with the options having different exercise prices and/or dates.
53
Straddle
A combination position consists of purchasing or writing both a put and a call on the same underlying interest, with the options having the same exercise price and expiration date.
54
At the Money
The current market value of the underlying interest is the same as the option's exercise price. A range option, which is of a single type rather than being categorized as a call or a put, is said to be at the money if the current level of the underlying index is at the top or bottom of the range length.
55
Out of The Money
If the exercise price of a call is above the current market value of the underlying interest, or if the exercise price of a put is below the current market value of the underlying interest, the call or put is said to be OUT OF THE MONEY.
56
Cap Interval
For capped options this is a constant established by the options market on which a series of capped options is traded. The exercise price for a capped-style option plus the cap interval (call) or minus the cap interval (put) equals the cap price. Call: Cap Int. + Cap Price = Exercise Price Put: Cap Int. - Cap price = Exercise Price
57
Cap Price
the level that the automatic exercise value of a capped option must reach in order for the option to be automatically exercised.
58
Automatic Exercise Value
For a capped option this is the price or level of the underlying interest determined in a manner fixed by the options market on which the option is traded for each trading day as of a specified time of that day.
59
Cash Settlement Amount (Capped Option)
The cash amount that the holder of a cash-settled capped option is entitled to receive upon the exercise of the option. In the case of a capped option that has been auto exercised the cash settlement amount is equal to the cap interval times the multiplier for the option, even if the auto exercise value on the day doe snot match the cap price. If the capped option is voluntarily exercised at expiration, the cash settlement amount is determined in the same manner as for other styles of cash-settled options.
60
Delayed Start Option
An option that does not have an exercise price when first introduced for trading but instead has an exercise price setting formula pursuant to which the exercise price will be fixed on a specified future date.
61
Exercise Price Setting Date
For a series of delayed start options, this is the date on which the options market on which the series is traded will set the exercise price for the series. This date is specified before the commencement of trading of each series of delayed options.
62
Exercise Price Setting Formula
The formula used by the options market on which the series is traded to set the exercise price for the series on the exercise price setting date. This is specified before the commencement of trading each series of delayed start option
63
Volume
Volume represents the number of options or stock shares traded in that particular underlying. Rule of thumb > 1k
64
Open Interest
The number of pending contracts that are open at a given strike price and expiration. High open interest indicates a high level of market participation, which means the bid-ask spreads could be narrow. Rule of thumb > 1k
65
Probability of Profit
The probability that a trade will have at least $0.01 in profit at expiration. Probability of profit is closely related to the probability of an option being OTM or ITM, depending on if the option is short (sold) or long (bought).
66
Implied Volatility (IV)
This refers to the annual potential movement of a stock's price. It is imperfect information that is derived from the underlying’s options market.
67
IV Rank
A measurement of the current IV level on a scale from 0-100. The scale is set with the low IV% being zero, and the high IV% being 100 over the course of a year. We find the rank of our current IV by subtracting the 52 week low from the current IV, and then weighing that against the IV range the underlying has seen over the course of the year. If the current IV is lower than 52 week low, we know that IV Rank must be zero right now, as the current IV is setting the new low.
68
Vertical Spread
The long option purchased is more expensive than the short option that is sold. The spread is “vertical” when the two options are in the same expiration cycle.
69
Debit Spread
The long option is the asset, and the short option is sold to reduce the cost basis of the long option.
70
Debit Spread
The long option is the asset, and the short option is sold to reduce the cost basis of the long option.
71
Vertical Credit Spread
A defined risk, directional trade that is the opposite of a vertical debit spread in the sense that the short option is now the asset. The long option is an asset as well, but in a different way - it is the insurance contract we purchase to protect our potential losses on the short option. A vertical credit spread is constructed by selling an option that is ATM or OTM, and buying an option that is further OTM than the short option to define our risk.
72
Short Put Vertical Spread
This is a bullish trade because we benefit most if the stock price rises. This would reduce the value of our spread, move it further away from the stock price, and increase our probability of the spread expiring worthless. Setup: - Sell OTM/ATM Put - Buy further OTM put than the short strike
73
Short Call Vertical Spread
This is a bearish trade because we benefit most if the stock price falls. This would reduce the value of our spread, move it further away from the stock price, and increase our probability of the spread expiring worthless. Setup: - Sell OTM/ATM Call - Buy further OTM call than the short strike
74
Long Call Vertical Spread
Regardless of the setup, buying a call debit spread is a bullish trade because our long call is our asset. We want the option to increase in value, and for that to happen at expiration it must move ITM, which would mean a bullish movement in the stock price above our call strike. Setup: - Buy ITM Call - Sell OTM Call
75
Long Put Vertical Spread
Regardless of the setup, buying a put debit spread is a bearish trade because our long put is our asset. We want the option to increase in value, and for that to happen at expiration it must move ITM, which would mean a bearish movement in the stock price below our long put strike. Setup: - Buy ITM Put - Sell OTM Put
76
Contango Commodity Market
A normal or contango commodity mar- ket is one in which long-term futures contracts trade at a premium to short-term contracts
77
Backwardation
If the cash price of a commodity is greater than a futures price, the market is backward or in backwardation.
78
Convenience Yield
The benefit of being able to ob- tain a commodity right now is sometimes referred to as a convenience yield

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