SGX Trading Rules Flashcards

What is a 'call option' in financial markets?

Answer: A contract giving the buyer the right, but not the obligation, to buy an underlying asset at a specified strike price on or before the expiry date

A call option gives the holder the right (not obligation) to buy the underlying asset at the strike price on or before expiry. The seller (writer) of the call option has the obligation to sell if the buyer exercises. Call options profit when the underlying price rises above the strike price.

A put option is 'in-the-money' when:

Answer: The current market price of the underlying asset is below the option's strike price

A put option is in-the-money (ITM) when the current market price of the underlying asset is below the option's strike price. The holder could exercise the right to sell at the higher strike price, creating intrinsic value equal to the difference.

What does 'theta' (time decay) mean for an option buyer?

Answer: The option loses value each day as time passes, working against the option buyer who has paid a premium

Theta measures the daily rate at which an option's value erodes due to the passage of time. For option buyers, theta is negative — they paid a premium and time decay works against them as the remaining time for a favourable move decreases.

What is 'delta' in options trading?

Answer: The rate of change in an option's price for a one-unit change in the price of the underlying asset

Delta measures how much an option's price is expected to change for every one-unit (S$1) change in the price of the underlying asset. A delta of 0.5 means the option price moves S$0.50 for every S$1 move in the underlying.

What is the 'premium' of an options contract?

Answer: The price paid by the option buyer to the option seller (writer) to acquire the rights under the contract

The option premium is the price paid by the buyer to the seller for acquiring the option. It represents the option's total market value, consisting of intrinsic value (in-the-money amount) and time value (value attributable to remaining time and volatility).

What is 'implied volatility' in options pricing?

Answer: The market's expectation of future volatility of the underlying asset, extracted from the current option price using an options pricing model

Implied volatility (IV) is the level of volatility that, when input into an options pricing model (such as Black-Scholes), produces the current market price of the option. It reflects the market's forward-looking expectation of how much the underlying will move, not its historical movement.