finance-mt2-cheat-sheet (2).docx

finance-mt2-cheat-sheet (2).docx - u=e t Bull Spread using...

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u = e σ ∆t d = e σ Bull Spread using calls Stock Price Payof S T < K 1 0 K 1 < S T < K 2 S T – K 1 S T > K 2 K 2 – K 1 Bull Spread using puts Stock Price Payof S T > K 2 0 K 1 < S T < K 2 S T – K 2 S T < K 1 K 1 – K 2 Bear Spread using calls Stock Price Payof S T > K 2 K 2 – K 1 K 1 < S T < K 2 K 1 – S T S T < K 1 0 Bear Spread using puts Stock Price Payof S T < K 1 K 2 – K 1 K 1 < S T < K 2 K 2 – S T S T > K 2 0 Box Spread Stock Price Payof S T < K 1 K 2 – K 1 K 1 < S T < K 2 K 2 – K 1 S T > K 2 K 2 – K 1 Butterfly Call Stock Price Payof S T < K 1 0 K 1 < S T < K 3 S T – K 1 K 2 < S T < K 3 K 3 – S T S T > K 3 0 Butterfly Put Stock Price Payof S T < K 1 0 K 1 < S T < K 3 K 1 – S T K 2 < S T < K 3 S T – K 3 S T > K 3 0 Straddle Stock Price Payof S T < K K – S T S T > K S T – K Strangle Stock Price Payof S T < K 1 K 1 – S T K 1 < S T < K 2 0 S T > K 2 S T – K 2 1. When there is a stock dividend, total value of stocks MUST ALWAYS be equal 2. Cash dividends unless unusually large have NO EFFECT on terms of an option 3. Number of warrants is fixed and trade on exchange, number of exchange-traded options depends on trading 4. LEAPS are long-term equity anticipation securities. They are exchange-traded options with long maturities 5. Option class is all calls/puts on certain stock 6. All options on a certain stock with a certain strike price and time to maturity are called option series 7. Sellers of options must post margin to guarantee payof of option will be made, buyer usually pays upfront so no margin is required 8. CBOE products include Weeklys, Binary options, and DOOM options but not Monthlys 9. Only options > than 9 months can be bought on margin 10. Margin accounts for options must be brought up to initial/maintenance margin level every day 11. Total gain/loss= (Strike price – Current price)*# of share 12. Trader makes profit when payof is more than price paid for option 13. When stock price ↑ but nothing else changes, values of calls ↑ and value of puts ↓ 14. When the strike price ↑but nothing else changes, value of puts ↑ and value of calls ↓ 15. When volatility ↑ but nothing else changes, likelihood of high payof from call or put ↑. Payof is never negative. As volatility ↑, value of options ↑ 16. When dividends ↑ but nothing else changes, puts ↑ and calls ↓ in value 17. When interest rates ↑ but nothing else changes, calls ↑ and puts ↓ 18. When time to maturity ↑ but nothing else changes, European options could ↑ or ↓ in value 19. The intrinsic value of an option is the value it would 22. When dividends are expected, the basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price 23. PV of expected dividends is 1 e r T payments 24. Put-call parity says puts increase by same amount as calls and vice versa 25. Put-call parity provides an upper and lower bound for the diferences between call and put prices 26. Buying a low strike price call and selling a high strike price call creates a bull spread . Can also be created by buying low strike put and selling high strike put
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