OPTIONS Flashcards
Whenever you buy an Option you are considered what position? (All 3 answers)
Driver, holder, long position
Holder / Buyer / Long
Whenever you sell an Option you are considered what position?
Passenger, writer, short position
Seller / Writer / Short
What does the Buy, 1, ABC, and May designations stand for?
Buy | 1 | ABC | May | 50 | Call | @4
Identifying the Option Position
Buy = action, 1= number of contracts, ABC = symbol (Company), May = expiration month.
What does the 50, the Call, and the @4 designations stand for?
Buy | 1 | ABC | May | 50 | Call | @4
50 = Strike price OR Exercise price Call = type of Option (Call or Put) @4 = Premium (cost of transaction), (@4 = $400)
What is the Aggregate Exercise Price of an Option?
The exercise or strike price of the Option contract multiplied by the number of units (generally 100 shares) of the underlying security in the contract (to buy or sell).
Generally speaking, multiply that number @5 x 100 i.e., = 500.
As to Options, what is to Assign or Assignment mean?
When the buyer of an Option (Put or Call, either) decides to exercise the option? (institute or engage the opposite party) that exercise will be assigned to the seller of the Option contract. It’s like the hockey faceoff of the deal or transaction.
What is the standardized or traditional option contract’s maximum expiration length?
9 months (from the time the contract is created).
What is the Premium in an Option contract?
The cost of engaging in the transaction.
Who pays for the Option contract and who receives payment for the contract/transaction?
The buyer pays for the contract and the seller receives the payment.
Ex: A Premium quoted @4 cost the buyer $400
$4.00 x 100 shares (the contract represents).
What is a Leap option?
An Option (contract) that has an expiration of 39 months. [3 1/4 yrs]
A bearish seller who does NOT own the stock he is bearish on is called what? And, a bearish seller who does have the stock in his possesion is called what?
A naked or uncovered call writer.
Covered call writer.
What is the most conservative Option position possible?
A short covered Call is the most conservative Option position possible.
What is the most speculative option position?
A short uncovered or naked call position is the most speculative Option position possible.
The Loss potential is unlimited.
An investor purchases an ABC December 70 Call and ABC’s current stock price is $60. Is he in the money, out of the money or at the money?
out of the money
What does at the money mean as to Options?
“At-the-money” has the same meaning for puts and calls and indicates that the strike price and the actual price are the same.
What Options position is:
Bullish (expecting sizeable upward movement)
RIGHT to buy stock (if exercised)
Limited Loss - premium paid (only $ loss)
Unlimited Profit Potential
Call - Buy / Long - Bullish
upper left-hand corner of Sides of the Market
What Option position is:
Bullish (expect Market to remain neutral or go up mildly)
Obligated to buy stock (if exercised)
Limited Profit - premium income (only profit available)
Limited Loss Potential
Put - Sell / Write / Short - Bullish
Top Right-hand position
What Option position is:
Bearish (expect Market to remain neutral or go down mildly)
Obligated to Sell stock if exercised
Limited Profit - Premium (ONLY)
Loss - Limited (if covered) UNLIMITED (if UNCOVERED)
Sell / Write / Short -
Call
Bearish
(Lower left-hand corner) Bearish
What Option position is: Bearish (expect sizable downward movement) Right to Sell stock (if exercised) Limited Loss - Premium Paid (only) Limited Profit Potential
Put - Buy / Long - Bearish
Lower right-hand corner
Options are on what kind of stock?
Common Stock - there are no Options on Preferred stock.
When is the only time an investor in Options has Unlimited Profit Potential?
When they Buy a Call
When an investor sells a call or sells a put, what is the only thing in it for them?
The money from the Premium.
What is the most conservative Option position possible?
A Short, Covered Call Writer (is the most Conservative position possible).
What is the most Speculative Option position possible?
A Short Uncovered Call Writer or Naked Call Writer is the most Speculative Option position possible.
The Loss Potential is Unlimited.
