Flashcards
Chapter 4 Quiz
Cards in this deck (20)
- 1Call Optionsrepresents the right of the its holder to buy the underlying asset at some time in the future
- 2Long Callpurchase a long call if you think the price is going to rise
- 3Short Callobligates the call seller to sell a security to the call buyer at the strike price if the call is exercised.
the bearish trading strategy, reflecting a bet that the security underlying the option will fall in price. - 4Put Optionsrepresents the right of its holder to sell the underlying asset at some time in the future
- 5Long Puthas a strike price, which is the price at which the put buyer has the right to sell the underlying asset
- 6Short Putwhen a trader sells or writes a put option on a security. The idea behind the short put is to profit from an increase in the stock's price by collecting the premium associated with a sale
- 7AmericanCan be exercised at any time up to and including the expiration date
No general formulas for valuing American options - 8EuropeanOnly be exercised on the expiration date
Typically valued using the Black-Scholes or Black model formula
Black-Scholes is an equation with a closed-form solution that has become a standard - 9Exchange-TradedStandardized in terms of underlying asset, strike price, delivery method, and expiration time
Each option contract is usually for a lot of 100 shares of the underlying
Bought and sold with ease: most options are short-term instruments with most trading volume in expirations of less than one year - 10Over-the-CounterCustomized to fit any particular needs an investor may have: price, strike price, expiration, underlying, or delivery terms
The option holder faces the possibility that the option writer will not fulfill his/her obligations - 11Moneyness of OptionsIn-The-Money
At-the-money
Out-of-the-money - 12IN-THE-MONEY (ITM)The price of the underlying is either higher than the strike price, as is with the call options, or lower than the strike with puts
- 13AT-THE-MONEY (ATM)The strike price of a call or put is equal to the underlying assets market price
- 14OUT-OF-THE-MONEY (OTM)the price of the underlying is lower than the strike price for call options and higher than the strike price for put options
- 15TYPES OF EXCHANGE-TRADED OPTIONSStock Option
Index Option
Interest Rate Option
Currency Option
Bond Option - 16Payoffs at Expiration*****
Depend on the type of positions investors are holding
The long positions give their holders the right to either buy or sell depending on whether they hold call or puts - 17Long Call Option PayoffC- call option premium
P-put option premium
St- Price of the underlying asset at expiration time
X - strike price - 18Net Payoffneed to subtract the price paid to get the option
- 19Stock OptionThese instruments are also known as equity options. They give the buyer the right to buy or sell an underlying stock at a certain strike price during a specific period of time or on a specific date
- 20Index OptionA call or put option on a financial index such as the NASDAQ or S&P 500
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- Finance Flashcards on Chapter 4 Quiz, created by Alex Tippett on 13/04/2021.
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- Alex Tippett
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