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Flashcards in options Deck (82):
1

2 parts to a options contract

buyer and seller

2

describe buyer of an options contract

-purchaser/holder
-long
-pays premium for the right to exercise contract

3

describe seller of an options contract

-seller/writer
-short
-receives premium for the obligation to sell if contract is exercised

4

1 contract of an equity options contract =

100 shares

5

1 premium of an equity options contract =

$100

6

what is the intrinsic value?

difference between strike price and current market value of stock

7

calculate intrinsic value:
xyz july 40 call, xyz stock trading @ 43

43 - 40 = 3

8

exercising american way

option contracts can be exercised anytime

9

exercising european way

option contracts can be exercised on last trading day only

10

when do option contracts expire?

expire in on the 3rd friday in the 9th month

11

describe LEAPS

longer maturity options contract
-expire in 30-39 months usually

12

describe same classes of options

they are the same type and same stock
-all ABC calls

13

describe same series of options

they are the same type, stock, strike price, and expiration
-all ABC sept. 30 calls

14

describe owners and sellers of calls

owners-pay premium for right to buy
sellers-receives premium for obligation to sell

15

market attitude for calls and puts in bullish markets

-buy calls
-sell puts

16

market attitude for calls and puts in bearish markets

-sells calls
-buy puts

17

cheat for premiums and strike prices when calculating calls and puts

-calls match (premium + strike price on same side of T-chart)
-puts cross (premium + strike price on opposite side of T-char)

18

describe a bullish long call position

be- strike price + premium
max gain- unlimited
max loss- premium

19

describe a bearish short call position

be- strike price + premium
max gain- premium
max loss- unlimited

20

what is a good way to increase income on portfolio?

write covered calls

21

what is time value?

the amount of an options premium that exceeds intrinsic value

22

formula for calculating time value

PIT
premium - intrinsic value = time value

23

what factors determine time value?

-amount of time remaining
-volatility of stock

24

describe owners and sellers of puts

-owner- pays premium for right to sell
-seller- receives premium for obligation to buy

25

describe a bearish long put position

be- strike price - premium
max gain- be to 0
max loss- premium

26

describe a bullish short put position

be- strike price - premium
max gain- premium
max loss- be to 0

27

what is the purposes of a hedge positions against stock?

for protection - buy
for income - sell

28

what kind of option position would hedge against a long stock position?

-buy put (most protection)
-sell call (make income on premium received)

29

buy a ____ to protect long stock position

put

30

buy a ____ to protect short stock position

call

31

definition of a straddle

buy a call and buy a put or sell a call and sell a put (same stock, same expiration, same XP)

32

what does buyer expect when buying a long straddle?

buyer expects volatility of the stock but direction is unknown

33

describe when a long straddle is profitable

when the price of stock is outside of BE points

34

max gain on a long straddle?

unlimited

35

describe when a short straddle is not profitable

when the price of stock is between BE points

36

max loss on a long straddle?

price of 2 premiums paid

37

describe when a short straddle is profitable

when the price of stock is inside of BE points

38

max gain on a short straddle?

price of 2 premiums received

39

describe when a short straddle is not profitbale

when the price of stock is outside of BE points

40

max loss on a short straddle?

unlimited

41

what does buyer expect when buying a short straddle?

used when little volatility is expected

42

definition of call spread

buy call and sell call

43

definition of put spread

buy put and sell put

44

describe a vertical spread

different strike prices (price, money)

45

describe a horizontal spread

different expiration only (calendar, time)

46

describe a diagonal spread

different strike price and expiration

47

max gain on credit spread

net credit
-is the difference in premiums

48

max loss on credit spreads

difference in strike prices - net credit

49

break even on call spreads

lower strike price + net premium

50

credit spreads are profitable if:

-difference in strike price narrows
-both options expire

51

net credit =

difference in premiums has more money coming in than out.
(selling more than buying)

52

net debit =

difference in premiums has more money going out than coming in.
(buying more than selling)

53

max gain on debit spreads

strike prices difference - net debit

54

max loss on credit spreads

net debit
-is the difference in premiums

55

break even on put spreads

higher strike price - net premium

56

debit spreads are profitable if:

-difference in premiums widens
-both options are exercised

57

which strike price is dominant in call spreads?

lower strike price is dominant

58

which strike price is dominant in put spreads?

higher strike price is dominant

59

what kind of spread?
b dec 50 call
s dec 45 call

45 dollars out, 50 dollar in = 5 dollar profit
credit, bearish call spread

60

call spreads are bearish if..

buy higher call, sell lower call

61

what kind of spread?
s dec 50 call
b dec 45 call

50 dollars in, 45 dollars out = 5 dollars out
debit, bullish call spread

62

call spreads are bullish if..

sell higher call, buy lower call

63

purpose of foreign currency options?

hedge change in value of foreign currencies versus US dollar

64

cheat for importers and exporters of options

EPIC
-exporters buy puts
-importers buy calls

65

tax rules for options when closing transactions

capital gain or loss when position is closed

66

tax rules for options when option contract expires

capital gain or loss when position expires
-gain if short, loss if long

67

tax rules for options when option contract is exercised

no gain or loss reported until stock position is closed

68

OCC

options clearing corporation
-options regulatory governing body

69

option disclosure statement

must be sent to customer at or before account approvel

70

when must options accounts be approved and by who before trades are allowed?

-must be approved before first trade date
-registered options principal must approve the account

71

purpose of options agreement and what does it contain?

covers brokering firm
-financial information
-investment experience
-disclosure statement understanding

72

how many days does customer have to sign and return option agreement?

within 15 days after account approval

73

when do option contracts settle?

t + 1 day

74

what exchange do options trade on?

Chicago Board Options Exchange

75

maximum number of contracts for equity positions?

250,000

76

all advertising and sales literature must be approved by?

registered options principal

77

describe advertising literature

-audience unknown
-must file with OCC 10 days before use
-no strategy recommendations

78

describe sales literature

-audience known
-no filing with OCC
-may recommend strategies

79

what are the 3 communication categories?

-retail
-correspondence
-institutional

80

what defines retail advertising?

25 or more of same material within 30 days

81

what defines correspondence advertising?

25 or less of same material within 30 days

82

what defines institutional advertising?

advertising to banks, etc.