Options 2 (Defined) Flashcards
(30 cards)
What does it mean to go Long an Option?
Long = Buy (Holder)
What is the position of an investor who sells an Option?
Goes “Short”
What is the definition of the term Short?
Sell and Short
Option sellers are known as what?
Option Writers
What is the seller of an option metaphorically doing?
An option is a contract between two parties, and the seller is metaphorically “writing” up a contract and selling it to another investor.
What is the definition of a “Call”?
Calls are contracts that provide the right to buy at the Strike price (a fixed price).
What does the purchaser of a Call able to do?
the right to buy stock at the strike price
In order to fulfill the holder in an Option contract, call writers have
the obligation to sell stock at the strike price
In this contract, 1 ABC Jan 40 call @ $5 while the market price is $39, what does the Writer do?
If the holder exercises the contract, the writer is obligated to sell 100 shares of stock at $40.
The option writer (seller) receives $500 (the Premium).
In this contract, 1 ABC Jan 40 call @ $5 while the market price is $39, what does the Buyer do?
Right to Buy 100 shares of ABC at SP of 40.
Puts are contracts that provide the right to do what?
the right to sell at a fixed price, the SP.
If you purchase a put, you can do what?
gain the right to sell stock at the strike price.
When are Puts exercised?
Puts are exercised if the market price of the stock falls below the strike price.
In order to fulfill the right of the holder, put writers have to?
the obligation to buy stock at the strike price.
When a customer goes long a call, what is their “animal” position on the stock? What do they think the price of the underlying security will do?
they are bullish
Bullish
Expectation of rising values
Purchasing a call provides the right to buy or sell a stock at the strike price.
Right to buy at SP
If the market price of the stock ________ the strike price of the call, the holder can potentially make a profit.
rises above the SP
If the market price of a Long call ____________ the strike price of a call, the holder will not exercise the option and realizes an overall loss equal to the premium.
falls below
When a customer goes short a call, they are ___________on the market price of the underlying security.
bearish
Selling a call obligates the customer (Buyer of the call) to __________ stock at the strike price if assigned (exercised). [Short Call]
sell stock
If the market price of the stock __________ the strike price of the call, the holder will exercise their option, forcing the writer to fulfill their obligation. [Short call]
rises above
If the market price _________ the strike price of a short call, the holder does not exercise their contract and the writer makes a gain equal to the premium.
falls below
When a customer goes long a put, they are bullish or bearish on the market price of the underlying security?
Bearish
Purchasing a put provides the ___________ stock at the strike price.
right to sell*
