Podcast
Questions and Answers
What type of option gives the buyer the right to sell the underlying asset?
What type of option gives the buyer the right to sell the underlying asset?
- American Option
- Put Option (correct)
- European Option
- Call Option
In a European option, the buyer can exercise the option any time before the expiration date.
In a European option, the buyer can exercise the option any time before the expiration date.
False (B)
What is the non-refundable price paid by the buyer to purchase an option called?
What is the non-refundable price paid by the buyer to purchase an option called?
Option Premium
In options trading, the seller faces a potential _____ cash flow if the buyer decides to exercise the option.
In options trading, the seller faces a potential _____ cash flow if the buyer decides to exercise the option.
Match the following types of options with their characteristics:
Match the following types of options with their characteristics:
Which statement about options is true?
Which statement about options is true?
The total cash flow for a buyer of an option is dependent solely on whether the option is exercised.
The total cash flow for a buyer of an option is dependent solely on whether the option is exercised.
Explain the term 'zero-sum game' in the context of trading options.
Explain the term 'zero-sum game' in the context of trading options.
What is the cash flow for Ajay if he exercises the call option and the stock price (ST) is 85?
What is the cash flow for Ajay if he exercises the call option and the stock price (ST) is 85?
Ajay can incur a negative cash flow when exercising his option.
Ajay can incur a negative cash flow when exercising his option.
What is the maximum profit for the seller of an option?
What is the maximum profit for the seller of an option?
If Ajay buys a put option at 70 per share, his maximum loss is the premium of _____ per share.
If Ajay buys a put option at 70 per share, his maximum loss is the premium of _____ per share.
Match the following terms with their definitions:
Match the following terms with their definitions:
What happens if the stock price (ST) is 60 three months hence?
What happens if the stock price (ST) is 60 three months hence?
A call option is exercised when ST < X.
A call option is exercised when ST < X.
What is the cash flow for Vijay if Ajay exercises the put option at a share price of 60?
What is the cash flow for Vijay if Ajay exercises the put option at a share price of 60?
When will a call option typically be exercised?
When will a call option typically be exercised?
A put option will always be exercised if the market price is lower than the exercise price.
A put option will always be exercised if the market price is lower than the exercise price.
What is the formula for profit calculation for put option holders?
What is the formula for profit calculation for put option holders?
In a zero-sum game, the gain of one party is equal to the ______ of another.
In a zero-sum game, the gain of one party is equal to the ______ of another.
Match the option types with their definitions:
Match the option types with their definitions:
Which statement describes the profit for put option writers?
Which statement describes the profit for put option writers?
A profit of 100*max[0,X-ST] means the option holder is in a losing position.
A profit of 100*max[0,X-ST] means the option holder is in a losing position.
What is the main characteristic of OTC contracts?
What is the main characteristic of OTC contracts?
In India, options typically expire on the ______ of the month.
In India, options typically expire on the ______ of the month.
What happens if a holder of a call option exercises it when ST = 70.45 and X = 70?
What happens if a holder of a call option exercises it when ST = 70.45 and X = 70?
Sunk costs should be considered when making investment decisions.
Sunk costs should be considered when making investment decisions.
What do call option holders receive if they exercise their option?
What do call option holders receive if they exercise their option?
Options trading results in wealth ______ from one party to another.
Options trading results in wealth ______ from one party to another.
Match the term with its description:
Match the term with its description:
Flashcards
Option
Option
A contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price (strike price) on or before a specific date (expiration date).
Option Premium
Option Premium
The price the buyer pays to purchase an option.
Strike Price
Strike Price
The price at which the underlying asset can be bought or sold if the option is exercised.
Call Option
Call Option
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Put Option
Put Option
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European Option
European Option
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American Option
American Option
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Futures Contract
Futures Contract
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Call Option Exercise
Call Option Exercise
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Call Option Cash Flow (Ajay)
Call Option Cash Flow (Ajay)
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Put Option Definition
Put Option Definition
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Put Option Profit/Loss (Ajay)
Put Option Profit/Loss (Ajay)
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Premium (Options)
Premium (Options)
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Strike Price (X)
Strike Price (X)
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Cash Flow for Option Seller (Vijay)
Cash Flow for Option Seller (Vijay)
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Put Option Exercise
Put Option Exercise
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Option Payoff (Put)
Option Payoff (Put)
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Option Payoff (Call)
Option Payoff (Call)
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Put Seller Profit
Put Seller Profit
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Call Seller Profit
Call Seller Profit
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In-the-money (ITM)
In-the-money (ITM)
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Out-of-the-money (OTM)
Out-of-the-money (OTM)
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At-the-money (ATM)
At-the-money (ATM)
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Sunk Cost
Sunk Cost
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Forward Contract
Forward Contract
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Option Contract Size
Option Contract Size
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Option Expiration Date
Option Expiration Date
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Study Notes
Futures and Options
- Options and futures both have expiration dates. After this date, the contract is void.
- Options contracts are contingent while futures are commitment contracts. Options give the buyer a right, not an obligation, to act on the contract. Futures contracts obligate both parties to complete the transaction.
- Options can be calls (right to buy) or puts (right to sell).
- European options can only be exercised at expiration.
- American options can be exercised at any time up to the expiration date.
- The option price, or premium, is the price paid by the buyer to the seller.
- Exercising a call option results in a profit for the buyer and a loss for the seller. Profits/losses are zero if the option isn't exercised.
- Options are similar to insurance; the premium is a non-refundable payment.
- Strike price, or exercise price, is the price an asset will be sold or bought at if the call or put is exercised.
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