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Questions and Answers
What is the role of the premium in an option contract?
What is the role of the premium in an option contract?
- It's a non-refundable payment from the buyer to the seller, compensating them for the risk taken. (correct)
- It's the profit made by the buyer when selling the option in the market.
- It's the amount paid by the buyer upon exercising the option to purchase the shares.
- It's a refundable fee paid by the seller to the buyer.
What happens when an option contract reaches its expiration date and the buyer takes no action?
What happens when an option contract reaches its expiration date and the buyer takes no action?
- The contract becomes worthless, and the buyer loses the premium paid. (correct)
- The contract is automatically exercised at the strike price.
- The seller is obligated to refund the premium to the buyer.
- The contract is extended for another period with adjusted terms.
What is the significance of the strike price in an options contract?
What is the significance of the strike price in an options contract?
- It is the price at which the option contract itself is bought and sold in the market.
- It is the initial price paid by the buyer to enter into the option contract.
- It is the predicted future price of the underlying asset, used to determine the premium.
- It is the price at which the underlying shares will be exchanged if the option is exercised. (correct)
Which of the following actions is NOT a possible choice for the buyer of an option contract?
Which of the following actions is NOT a possible choice for the buyer of an option contract?
What is the standard number of shares typically involved in an option contract?
What is the standard number of shares typically involved in an option contract?
What obligation does the option seller have if the buyer exercises the option?
What obligation does the option seller have if the buyer exercises the option?
Which scenario best describes the potential outcome for an option seller?
Which scenario best describes the potential outcome for an option seller?
What is the primary risk for a buyer who allows an option contract to expire without exercising or selling it?
What is the primary risk for a buyer who allows an option contract to expire without exercising or selling it?
An investor believes a stock's price will significantly increase in the next month. Which strategy reflects this?
An investor believes a stock's price will significantly increase in the next month. Which strategy reflects this?
An investor sells a call option on a stock they already own. What is the investor's primary goal in this scenario?
An investor sells a call option on a stock they already own. What is the investor's primary goal in this scenario?
Flashcards
Option Contract
Option Contract
Agreement where a buyer has the right, but not the obligation, to buy or sell an asset at a predetermined price during a specified period.
Strike Price
Strike Price
The set price at which the underlying asset is exchanged when an option is exercised.
Expiration Date
Expiration Date
The date after which an option contract is no longer valid, and the rights it confers cease to exist.
Premium (Options)
Premium (Options)
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Exercise (an Option)
Exercise (an Option)
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Study Notes
- An option contract is an agreement between a buyer and a seller
- When an option contract is exercised, one party delivers a set amount of stock (usually 100 shares) to the other party
- The shares are exchanged at a predetermined price, known as the strike price
- Contracts expire after the expiration date
- They can be traded for profit or loss, or exercised by the buyer before expiration
- Option sellers must fulfill the contract if the buyer exercises their option
- The buyer pays a non-refundable deposit to the seller as compensation for the risk the seller takes, called the premium
- As an option contract buyer, one can choose to exercise the contract, sell it in the open market, or let it expire (worthless)
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