Options Flashcards
(18 cards)
components of an options premium
time value + intrinsic value
time value=?
premium-intrinsic value
when does an option have intrinsic value?
ITM
call UP (market price above strike)
put DOWN (below strike)
calculate breakeven
call UP (strike price + premium)
put DOWN (strike - premium)
breakeven for straddle or combination
strike price of call + total premium
AND
strike price of put - total premium
breakeven for a call spread
lower strike price + net premium
breakeven for put spread
higher strike price -net premium
breakeven for a protective put
orginal cost of stock + premium
What is a protective put, and when is it used?
long stock and long put
used when hedging against downside risk (bearish)
insurance for market volatility
breakeven for a covered call
original cost of stock - premium
What is a covered call and when is it used?
long stock and short call
-income in a flat or slightly bullish market
-hedging a long stock position
What is max gain and loss for a covered call?
MaxGain (price>strike) = (StrikePrice−StockPurchasePrice) + Premium Received
MaxLoss (stock price drops to 0)= StockPurchasePrice − Premium Received
What is max gain and loss for a protective put?
MaxGain(unlimited since stock can continue to rise)=StockPriceIncrease−Premium Paid
MaxLoss(capped)=(StockPurchasePrice−PutStrike Price)+PremiumPaid
What is breakeven for a protective call?
short sale proceeds - premium
What is a protective call and when is it used?
short stock long call
-hedging a short stock position in case of stock price rise (expecting market to go down, bearish)
What is max gain and loss for a protective call?
Max Gain (stock price drops to 0)=StockShortSalePrice−Premium Paid
MaxLoss (capped by call strike price)=(CallStrikePrice−StockShortSalePrice) + PremiumPaid
