SIE Kaplan Unit 5

the buyer has the right to take an action

to buy the underlying asset from or sell the asset to the seller

options contracts are a type of

derivative investment

derivatives are often used for the asset class of

commodities (oil, gas, gold; these are called futures)

derivatives asset class

currency options (based on the value of a foreign currency versus the US dollar)

options contracts offer investors a means to

hedge, or protect an investment's value or speculate on the price movement of individual securities, markets, foreign currencies, and other instruments

futures are derivatives that have a commodity as the underlying asset

futures are not classified as securities

contract premium

the amount paid for the contract when purchased or received for the contract when it is sold

buyer (owner, holder, long the contract)

pays the premium for the contract

has the right to exercise the contract

risk losing the premium paid if the option expires

buyers begin the process with an opening purchase of the contract

if they decide to sell the contract later, the second transaction is called a closing sale

the seller (writer of the contract)

receives the premium for the contract and is called the writer or party who is short the contract

sellers can potentially profit

the amount of the premium received for the contract if the option expires as worthless

sellers begin the process with an opening sale of the contract

if they decide to buy back the contract later, the second transaction is called a closing purchase

buyer

-purchaser

-holder

-long

-pays premium

-owns the right

-is in control

seller

-writer

-short

-receives premium

-takes on obligation

buy calls (go long)

owns the right to buy 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract

a bullish investor

sell calls (go short) (writer)

has the obligation to sell 100 shares of a specific stock at the strike price if the buyer exercises the contract

a bearish investor

Long 1 XYZ Jan 60 Call at 3

-Jan (expires on the third Friday of January)

-60 (strike price)

-3 (premium is $3 per share)

writers of calls want the market price of the underlying stock to

fall (or stay the same)

buyers of calls want the market price of the underlying stock to

rise

buy puts (go long)

owns the right to sell 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract

bearish investor because he expects the price to fall

sell puts (go short)

has the obligation to buy 100 shares of a specific stock at the strike price if the buyer exercises the contract

bullish investor because he wants the price to rise

buyers of puts want the market price of the underlying stocks to

fall

a call buyer is a bullish investor because he wants

the market to rise (exercised only if the market price rises above the strike price)

a call writer is a bearish investor because he wants

the market to fall or remain unchanged (the contract is not exercised if the market price is below the strike price)

a put buyer is a bearish investor because he wants

the market to fall (the put is exercised only if the market price falls below the strike price)

a put writer is a bullish investor because he wants

the market to rise or remain unchanged (the contract is not exercised if the market price is above the strike price)

a call is in the money when

the price of the stock exceeds the strike price of the call

buyers want options to be in the money, sellers do not

a call is at the money when

the price of the stock equals the strike price of the call

sellers want at-the-money contracts at expiration, buyers do not (sellers keep the premium)

a call is out of the money when

the price of the stock is lower than the strike price of the call

sellers want contracts to be out of the money, buyers do not (sellers keep the premium)

a call has intrinsic value when

the market price of the stock is above the strike price of the call

the same as the amount a contract is in the money

a call option is at parity when

the premium equals intrinsic value

a put is in the money when

the price of the stock is lower than the strike price of the put

buyers want in-the-money contracts, sellers do not

a put is at the money when

the price of the stock equals the strike price of the put

sellers want in-the-money contracts, buyers do not

a put is out of the money when

the price of the stock is higher than the strike price of the put

sellers want out-of-the-money contracts, buyers do not

a put has intrinsic value when

the market price of the stock is below the strike price of the put

the same as the amount a contract is in the money