Options

Question 1

Option

Answer 1

Contract giving the holder the right (but not
obligation) to buy/sell an asset at a specified price
on or before a specified date.
* Call Option (C): Right to buy the asset.
* Put Option (P): Right to sell the asset.
* Strike Price (K or X): Agreed price in contract.
* Expiration Date (T): Maturity date.
* Premium: Price paid by the buyer to the seller.

Question 2

American Option & European Option

Answer 2

• American Option: Exercisable at any time up to
  expiration.
• European Option: Exercisable only at expiration.

American Option more flexible but also more expensive because of it

Question 3

Long Call

Answer 3

straight line then 45 Degrees up right. You buy a call = right to buy the stock at price 𝑋

If 𝑆𝑇>𝑋: You buy low (at strike), sell high (at market) → profit

If 𝑆𝑇≤𝑋: You don’t use the option → loss is zero or just the premium

Question 4

Short Call

Answer 4

straight line then 45 degrees down right.

You sell a call = you must sell the stock at strike if the buyer exercises

If
𝑆𝑇>𝑋: Buyer exercises → you lose money

Question 5

Long put

Answer 5

45 degrees down right then straight. You buy a put = right to sell at price
If
𝑆𝑇< 𝑋:You sell high (strike) while market is low → profit

If
𝑆𝑇≥𝑋: You don’t use it → worthless

Question 6

short put

Answer 6

45 degree right up then straight line. You sell a put = you may be forced to buy the stock at 𝑋.
If 𝑆𝑇<𝑋: Buyer exercises, you buy at higher price than market → loss

If 𝑆𝑇≥𝑋 : Buyer doesn’t use it → you keep the premium

Question 7

At-the-money

Answer 7

S = K. Break even

Question 8

In-the-money

Answer 8

Call: S > K, Put: S < K profit

Question 9

Out-of-the-money

Answer 9

Call: S < K, Put: S > K loss

Question 10

Delta

Answer 10

The delta of a stock option measures the sensitivity
of the option price to the price of the stock when
small changes are considered. Specifically, it is the
ratio of the change in the price of the stock option
to the change in the price of the underlying stock.