Options

Question 1

Quick Facts about Options

Answer 1

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Question 2

***EXAM TIP

Intrinsic value for call option and put option and time value formula

Answer 2

call: stock price - strike price
put: strike price - stock price
Intrinsic value can’t be less than $0

Time value = premium - intrinsic value

Question 3

***EXAM TIP

A. Which option will provide the investor with the maximum gains if the stock price appreciates?

B. Which option will provide the investor with maximizing gains if the stock price falls

Answer 3

A. buying a call.

B. Buying a put

Question 4

In the money, at the money, out of the money
for call and put options

Answer 4

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Question 5

***EXAM TIP
How do you calculate the gain/loss using options?

Answer 5

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Question 6

go over a covered call

Answer 6

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Question 7

***EXAM TIP

Go over a married put?

Answer 7

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Question 8

explain straddles (long and short) and if you can (collar or zero-cost collar)

Answer 8

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Question 9

***EXAM TIP
Explain the following models for option pricing

-Black/Scholes
-Put/Call Parity
-Binomial Pricing Model

Answer 9

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***KEYS TO KNOW:
BLACK SCHOLES and the variables it considers.
PUT/CALL PARITY attempts to value a put option based upon a call option.
BINOMIAL PRICING MODEL explains prices based upon the underlying asset price moving in two directions.

Question 10

***Taxability of options

for call options and put options

Answer 10

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Question 11

Explain Long Term Equity Anticiaption Securities (LEAPS) and Warrants

Answer 11

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Question 12

Explain Futures Contract

Answer 12

Important diff between futures and option contracts are as follows:

Option contracts give the holder the right to do something; futures contracts obligate the holder to make or take delivery of the underlying asset.

Future contracts do not state the per unit price of the underlying asset, which is determined by the supply and demand.

the 2 primary players in the futures markets are hedgers and speculators.

future contract are “marked to market”

the gain or loss (in cash) is credited/debited to your account on a daily basis.

Question 13

***EXAM TIP
Process of hedging a position for futures contracts

Answer 13

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