What happens when the buyer of an equity call option exercises?
The buyer of the call buys 100 shares of underlying common stock at the exercise price.
The seller of a Call has the obligation to Sell Stock.
The buyer of a Put has the right to Sell Stock.
Long Puts protect or hedge a LONG stock position.
The seller of a Put has the obligation to Buy Stock.
Equity option contract: typical number of shares
1 option contract = 100 shares of stock
Long Calls protect or hedge a SHORT stock position.
Investors who are bullish will either SELL a put option or BUY a call option.
What happens when the seller of an equity call option receives an exercise notice?
The seller of the call option is obligated to sell 100 shares of the underlying common stock at the exercise price.
Buyer of a Call has the right to Buy Stock.
When must a customer be approved for options trading?
Each customer must be specifically approved for options trading by a Registered Options Principal (ROP) prior to the time that the firm accepts an option order from the customer.
Registered Options Principals (ROPs)
approve customer options trading
Investors who are bearish will either SELL a call option or BUY a put option.
In the Money or Intrinsic Value for a Put
When the market price of the stock is less than the exercise price of the option
In the Money or Intrinsic Value for a Call
When the market price of the stock is greater than the exercise price of the option
Memory Aid: "Call Up" (+) "Put Down" (-)
Breakeven formula for put options (No stock transactions involved)
Exercise Price - Premium = Breakeven
Exercise or Strike Price
The fixed price of an option contract at which call buyers buy stock on exercise and put buyers sell stock on exercise.
Options Premium
The price at which an option contract trades. Premiums are paid by buyers and received by sellers.
What happens when the buyer of an equity put option exercises?
The buyer of the put option sells 100 shares of the underlying common stock at the exercise price.
Index Options
Options (puts and calls) on stock indices (ex. S&P 500) that settle in CASH, not stock.
Straddle
An equal number of puts and calls, both Long or both short, on the same stock with the same strike price, and the same expiration month. Long Straddle = Buy Call and Buy Put. Short Straddle = Sell Call and Sell Put
Spread
A long and short position in two call contracts or two put contracts on the same underlying stock. Call Spread = Buy Call and Sell Call. Put Spread = Buy Put and Sell Put
Bull Spread
will profit from a RISE in the market price of the stock.
Bear Spread
will profit from a DECLINE in the market price of the stock.
An investor who establishes a Short Straddle expects the market to remain neutral.
An investor who establishes a Long Straddle expects the market to make a major move, either up or down.
World Currency Options
Foreign currency options that are U.S. Dollar-settled and are issued and guaranteed by the OCC.
Interest Rate Options
Options on the YIELD of U.S. Treasury securities (not price). The value of these options is based on the interest rate and interest rate movements, not on the market price of the underlying treasuries.
Long-term Equity Anticipation Securities (LEAPS)
Long-term options on stocks and on stock indexes
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