Calls
You have purchased 1 ABC Jan 50 call @ 5. The current market value of ABC rose to $65.
What action would/should you take as the investor?
You can exercise your call and buy ABC at $50/share.
You have purchased 1 ABC Jun 45 put @ 7. The current market value of ABC dropped to 23.
What action would/should you take as the investor?
You can exercise the put and sell ABC at $45/share.
What are the two option strategies that profit in a rising market?
Rising market = BULLISH strategies
Long calls, Short puts
An investor holds the following positions:
Long 100 APL stock
L 1 APL Jun 45 put
What is this investor's dominant market outlook?
Bullish because of the long stock position
An investor owns 3 JKL Oct 45 call @ 3.
At expiration, the CMV is $40. What is the investors gain or loss?
The call contracts expire worthless as it has an IV of 0. The investor loses the total premium: $900.
Amelia writes a call. What is their maximum gain potential?
MG: Premium
The writer of a put on a listed stock is exercised. Upon assignment, the writer must...
Buy the stock at the strike price
What are the two option strategies that profit in a falling market?
Falling market = BEARISH strategies
Long puts, Short calls
An investor holds the following positions:
S 300 GHI stock
L 3 GHI Apr 50 call
What is this investor's dominant market outlook?
Bearish, because of the short stock position
A customer sells short 100 shares of XYZ stock @ $45 and shorts 1 XYZ Apr 45 put @ 3. What is the customer's maximum loss potential?
ML: Unlimited
The customer will see a ML (what we don't want to happen) when the CMV goes all the way to infinity. The short put will expire worthless, but the customer will have to buy back the stock in the open market to close out their position. (bonus: this strategy is called a covered put writer)
What is the dollar value for the following premium:
L 3 XYZ Apr 35 call @ 4 3/4?
Is this money being spent or received by the investor?
$1,425; spent
(pay attention to the number of contracts)
You open the following position:
Long 5 XYZ Apr 40 puts @ 4
What is your maximum loss potential?
ML = Premium x 5 = $400 X 5 = $2,000
(Hint: always double check the number of contracts!)
At what price threshold will the following position be in the money?
1 NOM Apr 45 put
CMV less than 45
You own 100 shares of ABC stock and expect the price to keep rising; however, you are a bit worried that it might move in the opposite direction.
How can you hedge your current position?
Purchase 1 ABC put contract.
(you're afraid of the price going down to 0 (bearish), so you do something bearish to protect your dominant position (bullish))
Find the breakeven of this stock + option position:
Long 100 ABC stock @ 50
L 1 ABC May 48 put @ 4
BE = $54
(Hint: use a T-chart to keep track of what money is being spent vs received)
What is the intrinsic value of the following position:
1 LMN Jun 30 call @ 8 with LMN currently trading at $37?
IV = 7
(Remember: Call UP; Put DOWN)
An investor wrote 5 LMN Sep 30 put @ 3.
What is the total cost of this position?
Did the investor spend or receive this money?
The investor received the premium of $1,500.
What transaction would close the following position:
Short 4 GHI Jun 45 calls @ 6?
Long 4 GHI Jun 45 calls
A customer is short ABC stock and would like to hedge their position. What would you recommend they do?
Buy a call.
They are afraid of the price rising (bullish) so they have to do something bullish for protection.
A customer buys 100 shares of ABC stock at $56 and buys 1 Jul 55 put @ 2.50. What is this customer's gain and loss potential with this position?
The customer has an unlimited gain potential (long stock) and limited loss potential (long put allows to sell the shares at the XP).
You have sold 1 XYZ Jul 55 call @ 8. The current market value of XYZ rose to $80. What are 3 ways this contract (obligation) can be assigned to you?
The OCC assigns a broker-dealer at random.
The broker-dealer can assign you the contract:
1. Randomly
2. FIFO
3. Any other method that is fair and reasonable
Which of these positions are 'in the money'?
ABC CMV = $56
1 ABC Jun 45 put
1 ABC Jul 58 put
1 ABC Oct 56 put
1 ABC Apr 53 put
1 ABC Jul 58 put
puts have IV when the CMV < XP
You own 1 GEF 35 put at 9. The current market value of GEF is $28. What is this investor's TIME value?
P = IV + TV
9 = 7 + TV
9 - 7 = TV
2 = TV
A customer owns 100 shares of XYZ stock at $40 and purchases 1 XYZ Jun 42 put at 3.
What best describes this investor's market outlook?
Worried bull.
They want the long stock to go up to infinity (bullish) but are afraid of the market going down to zero.
Which position would have the greatest loss if NYX was trading at $58?
L 1 NYX Apr 50 call @ 4
S 1 NYX Apr 50 call @ 7
L 1 NYX Apr 57 put @ 5
S 1 NYX Apr 65 put @6
Long 1 NYX Apr 57 put @ 5
put expires worthless and loses $500 (premium)
(L call gains $400; S call loses $100; S put loses $100)