Cheat sheet quiz 6

Cheat sheet quiz 6 - Option Terminology listed call option...

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Option Terminology listed call option A contract giving the holder the right to buy 100 shares of stock at a preset price (exercise or strike price) on or before a preset date. Expirations of 1,2,3,6,& 9 months and sometimes 1 year are normal contract periods. Contracts expire on the Saturday following the third Friday of the expiration month. Contracts may be sold prior to maturity listed put option A contract giving the holder the right to sell 100 shares of stock at a preset price on or before a preset date Option Characteristics If a call option holder decides to exercise the option (when?), he/she must pay the exercise price to the option writer. Exercise prices are adjusted for stock splits and stock dividends, but not cash dividends. The cost of an option is called the premium and it is a small percentage of the cost of the underlying asset. The option buyer pays the cost; the option writer receives the cost at the ,me of sale of the option. The underlying company is not involved in the option market. option are a zero sum game. American vs. European Options American: the option can be exercised at any date after purchase. European: the option can only be exercised immediately before expiration Uses of options: a. To hedge changes in stock price. b. Change your risk and return profile For example, buying a call is analogous to buying stock on margin. c. Short sale constraints can be avoided with puts. Option Clearing Corporation OCC OCC is jointly owned by option exchanges. OCC backs performance of both counterparties – To limit OCC’s risk, option seller (or writer) must post margin. Margin varies with option price and whether the option position is covered or exposed. When an option is exercised an option seller is randomly selected. – If a call is exercised the selected call writer must deliver 100 shares of stock in exchange for receiving the strike price. – If a put is exercised the selected put writer must purchase 100 shares of stock at the strike price. Types of options Listed options OTC options Index options is a call or put based on a stock market index such as the S&P 500 or the NY Exc index Options on Futures options give their holders the right to buy or sell as specified future contract, using a futures prices exercise the option price Foreign Currency options currency option offers the right to buy or sell a quatity of foreign currency for a specified amount of domestic currency Interest Rate options traded on Treasury notes and bonds, Treasury bills, certificateds of deposit, GNMA pass-through cert, yield on Treasury securities of various maturities. Exotic options Symbols & Valuation C t = Price paid for a call option at ,me t. t = 0 is today. T = Immediately before the option's expiration. P t = Price paid for a put option at time t.S t = Stock price at time t. X = Exercise or Strike Price. Payoff to holder at exp . = call is “ in the money ” if S t > X. A call is “ out of the money ” if S t < , = X.
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Cheat sheet quiz 6 - Option Terminology listed call option...

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