Options Markets

These flashcards cover key terms and concepts related to options markets and contracts.

Option Contract

A financial instrument that gives the buyer the right, but not the obligation, to buy or sell an asset at a specified exercise price on or before a specified expiration date.

Call Option

An option that gives the holder the right to buy an asset at a specified exercise price before or at expiration.

Put Option

An option that gives the holder the right to sell an asset at a specified exercise price before or at expiration.

Strike Price

The price set for calling or putting an asset in an options contract.

Premium

The purchase price of an option contract.

In the Money

A situation where exercising the option would generate a positive cash flow.

Out of the Money

A situation where exercising the option would generate a negative cash flow.

At the Money

A situation where the exercise price equals the asset price.

American Option

An option that can be exercised at any time on or before its expiration date.

European Option

An option that can be exercised only at its expiration date.

Payoff to Call Holder

For a call option, the payoff at expiration is max(0, S - X) where S is the stock price at expiration and X is the strike price.

Payoff to Put Holder

For a put option, the payoff at expiration is max(0, X - S) where S is the stock price at expiration and X is the strike price.

Protective Put

An investment strategy that combines holding an asset with buying a put option, protecting against a decline in the asset's value.

Covered Call

An investment strategy that involves writing call options on an asset that the investor already owns.

Straddle

An options strategy that involves buying a call option and a put option with the same exercise price and expiration date.

Spread

An options strategy that involves buying and selling two or more options on the same asset, with differing exercise prices or expiration dates.