Series 7 Ch. 5 Options

call option

the option to buy shares of stock at a specified time in the future

strike price

The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period

long call

Call
Long
holder/buyer
right to buy
? (bullish)

Short Call

Call
Short
writer/seller
obligation to sell
? (bearish)

Long Put

Put
Long
holder/buyer
right to sell
? (bearish)

Short put

Put
Short
writer/seller
obligation to buy
? (bullish)

breakeven point

When profit is zero. sum of the strike price and the premium

expiration date

last day you can buy at that fixed price

Options Contract

A contract that allows the holder to buy or sell 100 shares of an underlying security at a given price by a given date.

Underlying Security

The security that must be delivered when an options contract is exercised.

Expiration Date

The last day an options contract may be freely exercised before it becomes void. The last day is always the third Friday of the month.

Exercise or Strike Price

The price at which an options holder may buy or sell an underlying security.

Premium

The price paid to an option writer for the right to exercise the option before it expires.

Breakeven Point

The market price of an underlying stock at which the investor neither makes nor loses money

American-style option

An option that can be exercised at any time prior to closing is called an

European-style option

An option that can only be exercised on the closing date is

opening a position

someone buys or sells a call or put, the buyer is generally said to be opening a position.
The buyer of a call or put is opening a long position. The seller of a call or put is opening a short position.

Closing a position

holder/ writer takes the opposite position than whoever opens a position

trading the option

Opening and closing a position is considered

Intrinsic value

is the amount per share that the holder of an option stands to gain by exercising it. Stated another way, it is the extent to which the option is in the money.
For in the money call options: intrinsic value = market price - strike price
�For out of the mo

Time value

the residual difference between the intrinsic value and the premium. If an option is out of the money, since it has no intrinsic value, time value is equal to the premium.

covered call

When an investor owns the underlying security and decides to sell a call option on it,v

naked call

It is a naked call because the investor has sold something she doesn't own and is vulnerable to the market. If the price of the security goes through the roof and the call is exercised, she will have to come up with considerable cash to buy the shares in