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Unit 5: Options - Coggle Diagram
Unit 5: Options
Components of an options contract
Options Positions
Buyer : "hold a long position"
Seller: "short the contract"
Contract size
1 contract for 100 shares
Underlying Security: share of stocks
Expiration
Expire on the third Friday of the month at 11:59pm
Strike Price
agreed upon price written in the contract, regardless of the price it is trading for in the market
Type: Call or Put
Components of a call contract
Buyer: right to buy
Seller obligation to sell
Link with underlying security: Call goes up as US goes up
Components of a put contract
Buyer: right to sell
Seller has the obligation to buy
Link with expiration:
Buyer can leave option to expire unexercised if stock's market is above strike price because he can sell elsewhere for a higher price
Seller want the stock price at or above strike price and wants the option to expire unexercised, so that he doesn't have the obligation and keep the premium
Link with underlying security: Put goes up as US goes down
Premium
A quote
L 2 XYZ Jan 60 Call
3
Intrinsic value
In Call contracts
Stock price - Strike price = intrinsic value
In Put contracts
Strike price - stock price = intrinsinc value
Time value
Premium = IV + Time Value
Options Calculations
For Call Options
Breakeven
Maximum Gain
Maximum Loss
For Put Options
Breakeven
Maximum Gain
Maximum Loss
Options Strategies
Use of Options as a Hedge
to protect against the price of a security moving too much
Using Long Puts for protection
Using Long Calls for protection
Short Selling strategy
Use of Options to generate premium income
Selling Covered Calls
has enough underlying stocks
Selling Uncovered Calls
selling calls without owning it
Nonequity Options
Index Options
Ex: S&P 500 index, DJIA
Based on a measure that covers different markets
Broad based
Narrow based
Settlement times for equity and nonequity options
Settlement
Option trade
Exercice
Cash or delivery of stock
American and European Exercice rules
always American
Options rules and regulations
Process for adding options trading to an account
1) Representative must have reasonable grounds for believing options are a good investment for the client
2) Copy of Options disclosure document
3) account must be approved for options trading by registered options principal (ROP)
4) Options trades may be entered after account approval
5) Sign options agreement, no later than 15 days after
Primary regulators that oversee the options markets in the US
OOC
publich the Options Disclosure Document
CBOE