1 - Intro to Options Market Flashcards

1
Q

who is the biggest user of options? what are three further users?

A

Retail markets

  • individuals
  • private businesses
  • financial institutions
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2
Q

Why do people use options? (4 types)

A

risk management

  • hedging
  • speculation
  • short selling
  • leveraging opportunities
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3
Q

What are the features of an index option?

A
  • option on market index
  • cash settled on exercise
  • used for hedging/speculating market trends
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4
Q

what are the features of an equity/share option?

A
  • option on specific securities
  • shared exchanged on exercise
  • used for hedging/speculating individual stocks
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5
Q

What’s the difference between a call and a put option?

A

Call
-right to buy

Put
-right to sell

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6
Q

Whats the difference between and American and a European option?

A

American
- right to buy/sell on or before expiration

European
- right to buy/sell on expiration date

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7
Q

What is the risk premium?

A

The cost to buy an option

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8
Q

what are three features of over-the-counter options?

A
  • customised
  • private transactions
  • unregulated
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9
Q

what is meant by long and short positions?

A

long- you are the taker

short- you are the writer

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10
Q

when is an option at the money?

A

S=X

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11
Q

when is a call option in the money?

a put?

A

S>X

S

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12
Q

when is a call option out of the money?

a put?

A

SX

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13
Q

What is the intrinsic value?

A

the theoretical value of the option if the maturity date were today

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14
Q

how must a writer of an option ensure that they can deliver if exercised against?

A
  • cover themselves (insurance)

- maintain margin to offset uncovered position

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15
Q

When does the writer pay taxes?

A

when they receive the premium

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16
Q

When does a taker pay tax?

A
  • bought as a trading asset - losses deductible during yr they occur
  • bought as a hedge - option fee can be deductible (purchased on revenue account)
17
Q

Are ASX traded options American or European?

A

European

18
Q

What are the main benefits of an index option? 3

A
  • leverage (greater exposure to ASX)
  • low trading costs
  • exposed only to market risk
19
Q

What benefit does a share option have over an index option?

A

If you sell the share option you can protect yourself from a decrease in the underlying asset.

20
Q

What is the difference in a short call and a long put position?

A

shorting is selling something you don’t own - you have the obligation to deliver the goods at pre-determined price if exercised against
long put gives you the right but not the obligation to sell at a pre-determined price on the exercise date.
writing call = premium up front
long put = paying premium up front

21
Q

Why is an efficient market important to derivatives?

A

derivatives derive value from underlying asset - therefore its important that the underlying asset is correctly priced so that we can correctly value derivatives

22
Q

What are four transaction costs of trading options?

A
  • brokerage fees/comissions
  • bid-ask spread
  • admin fees (clearing house)
  • exchange fee (ASX fee)
23
Q

how is the tax treatment for the premium different for the writer and the taker of an option?

A

writer- receives premium - tax assessable

taker - pays premium - tax deductible