Options Trading & Strategies Flashcards

What is a call option?

Answer: The right to buy shares at a specified strike price

A call option grants the holder the right, but not the obligation, to purchase the underlying shares at the strike price before or on the expiration date.

An investor buys a put option with a $50 strike price when the stock is trading at $40. What is the intrinsic value of this put?

Answer: $10

A put option's intrinsic value equals the strike price minus the current stock price when in the money: $50 − $40 = $10.

What does 'in the money' mean for a call option?

Answer: The strike price is below the current market price

A call option is in the money when the underlying stock's current price exceeds the strike price, giving the option positive intrinsic value.

What is the maximum loss for a buyer of a call option?

Answer: The premium paid for the option

The maximum loss for a call buyer is limited to the premium paid, because the worst outcome is the option expiring worthless.

Which strategy profits most in a neutral market where the stock price remains flat near the strike price?

Answer: Short straddle

A short straddle (selling both a call and a put at the same strike) collects premium income and is most profitable when the stock price stays near the strike at expiration.

What is the options premium?

Answer: The price paid by the buyer to acquire the option contract

The premium is the total market price of the option contract paid by the buyer to the seller in exchange for the rights the contract conveys.

When does a long call option expire worthless?

Answer: When the stock price is at or below the strike price at expiration

A long call expires worthless when the stock price is at or below the strike price, because exercising the right to buy at the strike would be economically irrational.