Options (Puts/Calls) Flashcards

Question

What does the term Out of the money mean?

Answer 1

Term used to describe if your option contract is in a profitable state. For Calls - Market value must be over Strike For Puts - Market value must be under strike

Answer 2

The person buying the rights to buy/sell - This person paid the premium and hopes the stock price goes in their direction

Answer 3

The person selling the rights to buy/sell - This person hopes the option expires or is out of the money, so they keep the premium.

Answer 4

The premium may increase or decrease depending on if it is in the money, out of the money, or close to expiring. Other factors include § Amount of time the investor has to use the option § Volatility of the underlying security § Investor sentiment (is it the hot thing to do)

Answer 5

The purpose of calculating the value of an option premium over time is mainly to understand how the option's price behaves as it approaches expiration. This helps investors and traders make smarter decisions about when to buy, sell, or hold an option. Options with LATER expirations have HIGHER premiums (generally)

Answer 6

P = I + T P= Premium I= Intrinsic value T= Time value You slot in the numbers given and the do the math to calculate the missing variable. Ex, you may be given premium 6 with strike 30 on a call and market is 33 (intrinsic value is 3). 6 = 3 + T now just find the missing variable of T which is 3.

Answer 7

This number is used to describe how 'in the money' an option is. This number cannot be negative, the lowest is zero. Ex. A call option for ACB stock with strike price of 50 is 3 points in the money if the market value is 53. The intrinsic value is 3 Ex. A put option for XYZ stock with strike price 70 is in the money 7 points if the market value is 63. The intrinsic value is 7

Answer 8

The chart allows you to pick and choose options contracts based on your strategy. It calculates: ○ Gains and losses ○ Breakeven points ○ Maximum Gains and Losses It is also known as the 'options chain' that shows all available options contracts for a stock (or ETF) organized by: ○ Strike price ○ Expiration Date ○ Call options ○ Put options ○ Premiums

Answer 9

Money out on the left - any money leaving your pocket goes here Money in on the right - any money going into your pocket goes here

Answer 10

Max loss is calculated by multiplying the premium by lot. This is money out, so it goes on the left of the options chart. In the above the premium is 5 x 100 shares = $500 is the max loss Max gain is calculated by multiplying the strike by the market price. This is money out because as the buyer you are paying for shares at the strike price so this goes to the left of the chart. In the above 40 strike x 100 shares = 4000 Max gain. Breakeven is calculated by adding the Strike and Premium 40 + 5 = 45 the market price has to be for the investor to break even and cover his premium NOTE - Calls Same (Strike price and Premium go on the same side)

Answer 11

Max gain will be the premium x lot size so 2 x 100 = 200. This goes in the money in right side of the options chart, Max loss will be the strike x lot size so 60 x 100 = 6000. This also goes on the right side since that is what the seller of a call would be forced to sell at. Breakeven is calculated by adding the strike and premium so 60 + 2 = 62 NOTE - Calls Same (Strike price and Premium go on the same side)

Answer 12

Max loss - Buyers of options are capped to what they can lose to the premium amount paid. So in this example 600. This goes on the left side of the chart since it is money leaving your pocket. Max Gain - Buyers can exercise the Put option to sell at the strike price. Multiply the strike price 55 by the lot size 100 to get 5500, BUT THEN YOU MINUS THE PREMIUM giving you max gain of 4900. This goes on the right side of the chart because it is money coming in from a sale. The breakeven price for Puts is the Strike minus the Premium so 55-6= 49. The stock has to go to 49 a share for this to breakeven. NOTE - Puts switch - Premium and Strike Price on Opposite sides of the chart

Answer 13

Max gain - Multiply the premium rate by Lot size = 8 x 100 = 800 Gains go on the right side of the options chart because that is money in your pocket! Max loss - Multiply the Strike by the Lot and subtract the premium. 30 x 100 = 3000 - 800 = 2200 is the max loss (Short putter is forced to buy at the strike price) This goes on the left because you are spending money out your pocket to pay for. Breakeven - will always be Strike minus premium 30 - 8 = 22 Breakeven NOTE - Puts switch - Premium and Strike Price on Opposite sides

Answer 14

🧠 Why It Matters: Every transaction (1st buy/sell) must be closed out by a second transaction (2nd buy/sell) if the contract is not exercised. An opening transaction establishes a new long or short option position, while a closing transaction is used to exit or reverse that position before expiration — either to limit risk, take profits, or adjust exposure

Answer 15

Opening Purchase (Buy to Open) ○ 1st transaction used to purchase of a call/put option contract. (long position) ○ Must be closed out with a Closing Sale Opening Sale (Sell to open) ○ 1st transaction used to sell a call/ put (short position) ○ Must be closed out with a closing purchase

Answer 16

Closing Sale (sell to close) ○ 2nd transaction used to exit a long position you previously purchased. ○ Opened with a purchase Closing Purchase - ○ 2nd transaction used to exit a short position you previously sold ○ Opened with a sale

Answer 17

- Owner - Holder - Buyer - Scammer

Answer 18

- Seller - Writer - Grantor

Answer 19

The term "hedge" means to protect against financial risk or loss by making an offsetting investment. A hedge is like insurance — it helps reduce the chance of losing money when the market moves against your original position.

Answer 20

A covered call is when you own the underlying stock and you sell a call option on that stock. This strategy is used to: Generate extra income (from the premium) Potentially sell the stock at a target price Offer limited downside protection

Answer 21

Breakeven Price = Purchase Price – Premium Received 📌 Scenario Setup: You own 100 shares of ABC at $50 You sell 1 ABC 55 Call for $2 premium You bought the stock at $50 You received a $2 premium 📉 That premium reduces your cost basis: ✅ So, you break even at $48 — if the stock falls to $48, your loss on the stock is offset by the $2 you collected.

Answer 22

Index options are options contracts where the underlying asset is a stock market index, not a single stock. - These come in two flavors ○ Broad based - these track the performance of broad index funds like S&P 500 (SPX), Nasdaq-100 (NDX), or Russell 2000 (RUT ○ Narrow based - these track more specific index funds like the energy sector (IXE), financial sector (IXM), health sector (IXV), tech sector (IXU).

Answer 23

- Premiums of Index options are calculated using the VIX (CBOE) volatility measurement. The higher the volatility the higher the premium. - Units for stock options are also measured with 100 size units. You still multiply the premium by the units to get the cost.

Answer 24

- When an index option is exercised, the underlying security is not bought/sold. Instead cash is delivered based on the end of day price.

Answer 25

- Narrow based index options trade until 400pm est. - Broad based index options trade until 4:15pm est.

Answer 26

○ Settlement is the next business day. T+1

Answer 27

The options clearing corporation (OCC) is the guarantor of all options contracts. They decide which options will trade as well as their strike prices. OCC does NOT determine the premium, that is set by investors supply and demand, intrinsic value, time to exercise, and price of the underlying security

Answer 28

- If an investor exercises their option, they randomly decide which firm will fulfill the terms for the investor on the opposite side.

Answer 29

The options risk disclosure document (ODD) outlining all the risks associated with trading options. - Must be delivered at the time of or before the account is approved. ○ Prior to the first transaction - It includes: ○ Copy of any amendments ○ Options terminology and strategies ○ Potential rewards and risks involved such as losing all your money or in the case of selling a call, facing an unlimited loss potential. Also includes tax rules, transaction costs, margin requirements, a special statement for uncovered options writers, and so on.

Answer 30

Registered options principal (ROP) is a Series 4 licensed Individual who approves and signs all new accounts and options order tickets. - The ROP determines the amount of risk that each investor can take. - Accredited investors have higher risk tolerance.

Answer 31

Options account agreement (OAA) is a legal document that is signed by the customer indicating they have read and understand the ODD. - Must be signed and returned within 15 days of ROP approval - If anything changes w the client's financial situation, they agree to notify the firm. ○ If document is not received back, the client cannot open new options tickets.

Answer 32

- The two unique items that must be included are if the transaction is covered/uncovered and if it is a short/long position. ○ Long - buying ○ Short - selling ○ Covered - client owns the shares ○ Uncovered - client does not own the shares.

Answer 33

✅ Answer: The last trading day for a standard listed stock option is the third Friday of the expiration month, before market close (typically 4:00 PM ET)

Answer 34

✅ Answer: For standard equity options, the cutoff time to submit a notice of exercise is typically 5:30 PM ET on the expiration date (the same third Friday). However, many brokerage firms set their own earlier internal deadline — often between 4:30–5:00 PM ET — so it’s always smart to check with your firm.

Answer 35

✅ Answer: For standard listed equity options, expiration occurs on the Saturday following the third Friday of the expiration month. BUT — trading ends the day before, which is: The third Friday of the month by 4:00 PM ET (Unless that Friday is a market holiday — then it’s the Thursday before.)

Answer 36

🟩 TRADED Options (Buy/Sell on Market) ✅ Settlement: T+1 📅 1 business day after the trade date "Trade → T+1" 🟪 EXERCISED Options 1️⃣ Option Contract: ✅ Settles Immediately (no delay) 2️⃣ Underlying Stock Transaction: ✅ Settles: T+2 📅 2 business days after the exercise date "Exercise → Stock settles T+2"

Answer 37

1. Client 1 tells their broker dealer (broker A) to exercise the option 2. Broker A contacts OCC 3. The OCC assigns broker dealer B randomly to fulfil the request 4. Broker B assigns a client randomly or via FIFO or by other method that is fair and reasonable (note broker B CANNOT chose based on size of options contracts - the amount someone has or does not) 5. Client 2 sends the proceeds (stock or cash) to Broker B 6. Broker B sends the stock or cash to Broker A to fulfil obligation

Answer 38

✅ Answer: Owning stock and selling a call option on it. Used to generate income and cap upside while reducing downside slightly.

Answer 39

✅ Answer: Breakeven = Stock Purchase Price – Premium Received Example: Bought at $50, sold call for $2 → Breakeven = $48

Answer 40

✅ Answer: (Strike Price – Purchase Price) + Premium Received Capped because you sold the call

Answer 41

Call Buyer: Breakeven = Strike + Premium Paid Put Buyer: Breakeven = Strike - Premium Paid Call Seller: Same as Call Buyer (but hoping price stays below breakeven) Put Seller: Same as Put Buyer (but hoping price stays above breakeven)

Answer 42

The exercise (strike) price of an option multiplied by the number of units (shares) of the underlying security covered by the option contract (usually 100 shares) ○ Strike x Shares = Aggregate Exercise Price

Answer 43

All options contracts of the same type (puts or calls) covering the same underlying security or index.

Answer 44

A FINRA member that has been admitted membership to the OCC.

Answer 45

A transaction used to eliminate or close out of a long position. ○ EX: Investor purchases 1 ABC Oct 40 Call, they will write (sell) 1 ABC Oct 40 Call to close the position.

Answer 46

An index option with a basket (9 or more equity securities) in which no one security compromises more than 30 percent of the basket or index.

Answer 47

Any option contract not issued or subject to issuance by the OCC or an OCC cleared OTC option.

Answer 48

An equity option position that has been completely hedged (insured) because the PUT option is at the money (fully covering the downward spiral)

Answer 49

The number of shares that must be maintained (either long or short) to offset the risk the investor faces by having an equity option position.

Answer 50

The initial sale of an option, the seller received the premium.

Answer 51

A contract that has not been exercised and has not expired.

Answer 52

All option contracts that cover the same class, same expiration, same exercise price, and that cover the same number of units of the underlying security or index.

Answer 53

Either call or put