What is a call option?
The right to buy an underlying asset at a specified price within a certain time
What is a put option?
The right to sell an underlying asset at a specified price within a certain time
What is the strike price?
The price at which the underlying asset can be bought or sold
What is the premium in options trading?
The price paid for the option contract
What is expiration date in options?
The last date the option can be exercised
What does it mean to be ‘in the money’ (ITM)?
Option has intrinsic value (call: market > strike; put: market < strike)
What does it mean to be ‘at the money’ (ATM)?
Market price equals the strike price
What does it mean to be ‘out of the money’ (OTM)?
Option has no intrinsic value
What is intrinsic value?
The amount an option is in the money
What is time value in options?
The portion of the premium based on time until expiration
What happens to options at expiration if they are OTM?
They expire worthless
What is a covered call?
Selling a call option while owning the underlying stock
What is the goal of a covered call strategy?
Generate income from premiums
What is a protective put?
Buying a put to protect against downside risk in a stock position
What is the maximum loss for a call buyer?
The premium paid
What is the maximum gain for a call buyer?
Unlimited
What is the maximum gain for a put buyer?
Strike price minus premium (if stock goes to zero)
What is the maximum loss for a put buyer?
The premium paid
What obligation does a call seller have?
Must sell the underlying asset at the strike price if exercised
What obligation does a put seller have?
Must buy the underlying asset at the strike price if exercised
What is a European option?
Can only be exercised at expiration
What is an American option?
Can be exercised anytime before expiration
What is leverage in options?
Controlling a large position with a small investment
What is the breakeven for a call option?
Strike price + premium
