Options puts and calls Flashcards Preview

Investment Management > Options puts and calls > Flashcards

Flashcards in Options puts and calls Deck (26):
1


Stocks vs. Options (stock ex.)


XYZ stock is currently selling @ $25
I have $2500 to invest so I buy 100 shares

  The stock goes to $40 and I sell
$4000 – 2500 = $1500 profit
 

2


Stocks vs. Options (option ex.)


XYZ option is currently selling @ $3 1/8
I have $2500 to invest so I buy 800 call options

The stock goes to $40 and thus the option goes to 15 and I sell my 800 options
$12,000 – 2500 = $9,500 profit
 

3


Option:


the right to buy or sell a certain amount of an underlying financial asset at a specified price for a given period of time.

4


Types of options:


- puts
- calls
- warrants

 

- all of the above are types of derivatives

5


derivatives


have no value in itself (derives its value from how it has been chosen to be used)

6


Puts and Calls:


created by individual investors, not by the organizations that issue the underlying financial asset.

7


Option Buyer:


has the right to buy or sell an underlying asset for a given period of time, at a price that was fixed at the time of the option contract in exchange for paying the seller a fee
- buyer can walk away from a bad option

8


Option Seller/Maker/Writer


- has the obligation to buy or sell the underlying asset according to the terms of the option contract, for which the seller has be paid certain amount of money
- seller cannot walk away from a bad option

9


Call:


- gives the holder (buyer) the right to buy the underlying security at a specified price over a set period of time
- the buyer of the call option wants the price of the underlying assets to go up
- the seller/maker/writer of the call option wants the price of the underlying assets to go down
- hope the market rises

10


Put:


- gives the right to sell at a specified price over a set period of time
- the buyer of a put option wants the market to go down
- the seller of a put option wants the market to go up

11


Calls- a key question ??

Are you covered? Or are you naked?
 

- you are covered if you own the underlying security
- if you do not own and all you do is trade options then you are naked
- running naked is always riskier than running covered

 

12


Strike (Exercise) price:


- stated price at which you can buy a security with a call or sell a security with a put

13

Expiration Date:


Date in which the option becomes worthless

 

14


In the Money call


- when the stock price>strike price (when you make money)

 

15


Out of the Money Call


       - when the stock price< strike price

16


Option Trading Strategies:


- Buying for Speculation
- Hedging
- Writing Options

17


Straddle


- write a put and call, if the stock doesn't move the writer makes money, both sides will be covered and you make money, if the price does fluctuate (up or down)  then you will lose money

-If you think it is going to move then you buy a put and call  (can move up or down) lose money if the stock does nothing
 

18


Hedging with Stock Options


- purpose is to reduce or eliminate risk
- combines two or more securities into a  single investment position
- hedging a "long" position
       - buying a put and holding appreciated stock in the same company
       - buying a put would provide "insurance" in case the stock price went down before you sold the stock


 

19


Writing Stock Options:



- The seller/maker/ writer is betting that the option buyer will be wrong about the direction of the stock price
- statistically, the odds favor the writer over the buyer
       - easy money if the option expires worthless.  The writer cannot make more than the fee received
       high risk if the option is "in the money"
               - naked options: writer does not own the optioned securities and has to buy them.  No limit on loss exposure
               - covered options: writer owns the optioned securities.  Loss exposure is limited to the price originally paid for the securities

 

20


Equity Collars:

 


- used by large investors who have accumulated a large position in a given stock and who are primarily concerned about he downside risk of their holdings.
- you give up some of  the stocks upside potential  in order to obtain the desired downside protection at little or no cost
- equity collar consists of the simultaneous purchase of a put option, and writing of a call option, limit the downside risk by purchasing the put, limiting your upside by purchasing the call
- money you make on the call will make up for loss on the put

21


stock index option:


a put or call option written on a specific stock market index

22


Advantages of Warrants

 

Offer a chance to benefit indirectly if the common stock price goes up without buying the stock
Low unit cost
Loss exposure is limited to price of warrant

23

Options: Warrants

 

 


- a long lived option that gives the holder the right to buy stock in a company at a price specified on the warrant
- have the longest lives of all options, with maturities that extend out 5, 10 or even 20 years
- created by organizations that issue the underlying financial asset
- usually added as "sweeteners" to bond issues
- gives you the right to buy 50 shares of stock at 50 dollars a share, certain share price, doesn't have to be 50 just example,  price tends to be more than share price, if company becomes successful share price goes up but you still pay the same amount you paid at the warrant

 

24


Disadvantages of Warrants


- have no voting rights
- pay no dividends
- have not claims on assets of the issuing company
- eventually expire

 

25

26