Options, Characteristics, Suitability Flashcards
(72 cards)
What do long options allow investors to do?
Speculate on the price movement of a stock without the capital outlay of buying the shares outright
Long options include buying calls or puts.
How do options differ from stock purchases?
Options are short-term and may expire worthless
This contrasts with stock purchases, which represent ownership in a company.
What is a long call used for?
Bullish speculation
Investors anticipate that the stock price will rise.
What is a long put used for?
Bearish speculation
Investors anticipate that the stock price will fall.
Who are long options unsuitable for?
Investors seeking income or those who cannot afford a total loss of capital
Long options involve significant risk.
Fill in the blank: Long calls are for _______ speculation.
bullish
Fill in the blank: Long puts are for _______ speculation.
bearish
True or False: Long options can be a good strategy for long-term investing.
False
Options are short-term instruments.
What is a risk associated with long options?
They may expire worthless
This leads to a total loss of the investment.
What do option sellers accept in exchange for premium income?
Potential future obligation
This refers to the commitment to fulfill the terms of the option if it is exercised by the buyer.
How is income limited for option sellers?
To the premium if the option expires worthless
This means that the maximum profit is the premium received from selling the option.
What is the potential future loss for option sellers?
Substantial, or even unlimited
This indicates that if the market moves against the position, losses can exceed the initial premium received.
Who is suitable for selling options?
Sophisticated investors willing to accept substantial risk
These investors understand the complexities and risks associated with options trading.
Who is unsuitable for selling options?
Investors who cannot assume substantial risk
Such investors may not have the financial capacity to absorb potential losses.
What is a Long Straddle?
Buying both a call and a put on the same stock to speculate on price volatility
A Long Straddle involves two options: a call and a put with the same expiration and strike price.
What is a Long Combination?
Buying both a call and a put on the same stock, but with different expirations and/or strike prices
A Long Combination allows for more flexibility in managing different time frames or price levels.
What happens to the premiums in a Long Straddle if the price remains stable?
Loss of combined premiums occurs
This means the investor may lose the money spent on the options if the stock price does not move significantly.
Who is a Long Straddle suitable for?
Investors seeking to speculate on short-term price volatility; neither bullish nor bearish
This strategy is appropriate for those who anticipate significant price movement but are uncertain about the direction.
Who is a Long Straddle unsuitable for?
Investors seeking income or those who cannot afford loss of capital
This strategy carries the risk of losing the entire investment in premiums if the market does not move.
What are the key components of a Straddle?
Same stock, expiration, and strike price
The Straddle strategy is defined by these components to create a balanced risk-reward scenario.
What does a Long Straddle speculate on?
Price volatility
Investors expect the stock price to move significantly in either direction.
What is a Short Straddle?
Selling both a call and a put on the same stock to generate income of the combined premiums
A straddle involves options with the same stock, expiration, and strikes.
What is a Short Combination?
Selling both a call and a put on the same stock with different expirations and/or strikes
A combination differs from a straddle by having different expiration dates or strike prices.
What is the potential future loss of a Short Straddle or Short Combination?
Potential future loss may be substantial or even unlimited
This highlights the significant risk associated with these strategies.
