C10: Options Exam #1 Question with verified answers
Buyer of an option is: - √√Person who buys (pays premium, is long the option) &
has the right to do something
Seller of an option is: - √√Person who writes/sells option (rec'd premium, is short
the option) & has an obligation to do something
What is a Call Option? - √√Gives the Buyer the right to buy the underlying stock at
a set (strike) price
What are the characteristics of a call option? - √√-Buyer wants stock to go up (call
up)
-Bullish
What is a Put Option? - √√Gives the Buyer the right to sell the underlying stock at
a set (strike) price
What are the characteristics of a put option? - √√-Buyer wants stock to go down
(put down)
-Bearish
How many shares does a single Option repesent? - √√For every 1 options contract
there is 100 shares of the underlying security
What are the 7 components of an option? - √√1. Whether investor is the buyer
(long) or seller (short) the option
2. Number of contracts
, 3. Name of underlying security
4. Expiration month (on the 3rd Friday)
5. Exercise/Strike price
6. Type of option (call/put)
7. How much investor paid for option (premium)
When is a call option in-, at-, & out-the-money? - √√>In-the-money: when market
prices is above the strike price
>At-the-money: when market price is the same as strike price
>Out-the-money: when the market price is below the strike price
*NOTE - call option should be exercised when the market is up (bullish)
When is a put option in-, at-, & out-the-money? - √√>In-the-money: when market
price is below the strike price
>At-the-money: when market price is the same as strike price
>Out-the-money: when the market price is above the strike price
*NOTE - put option should be exercised when the market is down (bearish)
How is the premium for an Option calculated? - √√Premium = Intrinsic Value +
Time Value
What is intrinsic value? - √√the amount by which an option is in-the-money
(think in-trinsic, in-the-money)
Buyer of an option is: - √√Person who buys (pays premium, is long the option) &
has the right to do something
Seller of an option is: - √√Person who writes/sells option (rec'd premium, is short
the option) & has an obligation to do something
What is a Call Option? - √√Gives the Buyer the right to buy the underlying stock at
a set (strike) price
What are the characteristics of a call option? - √√-Buyer wants stock to go up (call
up)
-Bullish
What is a Put Option? - √√Gives the Buyer the right to sell the underlying stock at
a set (strike) price
What are the characteristics of a put option? - √√-Buyer wants stock to go down
(put down)
-Bearish
How many shares does a single Option repesent? - √√For every 1 options contract
there is 100 shares of the underlying security
What are the 7 components of an option? - √√1. Whether investor is the buyer
(long) or seller (short) the option
2. Number of contracts
, 3. Name of underlying security
4. Expiration month (on the 3rd Friday)
5. Exercise/Strike price
6. Type of option (call/put)
7. How much investor paid for option (premium)
When is a call option in-, at-, & out-the-money? - √√>In-the-money: when market
prices is above the strike price
>At-the-money: when market price is the same as strike price
>Out-the-money: when the market price is below the strike price
*NOTE - call option should be exercised when the market is up (bullish)
When is a put option in-, at-, & out-the-money? - √√>In-the-money: when market
price is below the strike price
>At-the-money: when market price is the same as strike price
>Out-the-money: when the market price is above the strike price
*NOTE - put option should be exercised when the market is down (bearish)
How is the premium for an Option calculated? - √√Premium = Intrinsic Value +
Time Value
What is intrinsic value? - √√the amount by which an option is in-the-money
(think in-trinsic, in-the-money)
