Options Flashcards
Option contract term adjustments:
of shares in contract or # of option contracts will change if stock changes:
Stock dividends
Stock splits
Right distributions
Long calls and short puts = same side of the market (bullish)
Long puts and short calls = same side of the market (bearish)
Ex dividend(options)
Exercise date of the option determines who will be owner of the stock:
If call excised notice is filed with OCC prior to ex date buyer long will receive dividend if own stock
If put excised notice is filed with OCC prior to ex date, assigned put writer will receive dividend, because they own the stock
Intrinsic value
Of an option is in-the-money amount of the option.( the more the option is in the money the HIGHER THE PREMIUM ). Difference bt stocks mkt px and options price, if exercised would be profitable to holder of long position
Time value
Is the amount of premium which exceeds the intrinsic value. Options are referred to as “wasting assets” because their valid declines the closer you get to the expiration date.
Following would affect price of premium:
- Market price of stock
- Time until expiration of the option
- Volatility of stock
- Changes in interest rates
Intrinsic and time value:
Buy 1 ABC May 50 Call @8, ABC @ 55
Intrinsic Value= 5 points
Time Value= 3 points
Continued IV and TV
The premium value of an option will move dollar for dollar with the price of the stock when option is “at the money” or “in the money”
Spread
Basic option spread is “long & short” position in 2 call contracts or 2 put contracts on same stock. But w/ different expiration months and/or dif strike prices
Use of Spreads:
Primary use of spreads is to limit risk, limits risk, limits profit potential, feel sure about direction of the market.
Not expected exercising. Make or lose money on premiums.
Calendar/horizontal/time spreads:
Different expiration months
Long 1 ABC May 50 Call
Short 1 ABC Aug 50 Call
Vertical Spread
Spread has 2 different strike prices, are either bullish or bearish
Vertical Bull Spread:
Buy option with LOWER strike price and sell option with the HIGHER strike price.
Vertical Bear Spread:
Buy option with HIGHER strike price and sell option with the LOWER strike price.
Diagonal Spread:
Different exercise prices and different expiration months
The Spread is the difference in premiums
When an investor puts a spread results in a Net Credit(+) or Net Debit(-)
Buy (-)
Sell (+)
NOTE: for Debit Spreads
We do not want option to expire
To profit we always want debit spreads to “widen” by more than the “original debit”
Summary of Debit Spread:
Maximum loss potential is the “net debit in premiums”
Max profit, different bt 2 strike prices less the net debit
Debit spreads must widen by more than the net debit
Credit spread:
Max profit potential is the net credit in the premiums, if option expires.
Max loss potential is dif bt 2 strike prices less the credit in premiums
Credit spreads must narrow
Straddle:
Opposite of spreads, it is an equal # of puts and calls, both long or both short on same stock with same expiration month and same expiration price
2 types of straddles:
Long = buy call and put
Short = sell call and put
Long Straddle:
= long call and long put
Investor anticipates major move in price but unsure of direction move.
If stock price moves up of down could make $ by exercising one option position and let other expire.
If options expire, max loss potential is premiums paid
Short straddle:
=short call and short put
Stock price remain NEUTRAL
Make $ from premiums received from sale of the put and call
Short call straddle to be UNCOVERED, could mean unlimited loss
