6 - Option Strategies and Risk Management Flashcards

1
Q

what does a positive N imply, what does a negative N imply?

A

postive N - go long

negative N - go short

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2
Q

what does capital pi stand for?

A

profit

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3
Q

what does Nc, Np and Ns stand for?

A

number of calls, puts or stocks

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4
Q

what is the profit equation for buying a call? for selling a call?

A

cap pi = Nc (max(0,St-X) - C)

cap pi = -Nc (max(0,St-X) + C)

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5
Q

what is the profit equation for buying a put? for selling a put?

A

cap pi = Np (max(0,X-St) - P)

cap pi = -Np (max(0,X-St) + P)

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6
Q

in regards to premium for a call or put, when do you receive the premium and when do you pay the premium?

A

buy - pay premium (hence -C/-P)

sell - receive premium (+C/+P)

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7
Q

what is the profit equation for a stock?

A

cap pi = Ns (St-So)

cap pi = Ns (-St+So)

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8
Q

when you buy a stock what is the maximum profit? loss?

A
profit = infinite
loss = initial payment i.e. So
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9
Q

when you sell a stock what is the maximum profit? loss?

A
profit = initial payment received i.e. So
loss = - infinite
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10
Q

when you buy a call what is the maximum profit? loss?

A
profit = infinite
loss = initial payment i.e. C premium paid
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11
Q

when you sell a call what is the maximum profit? loss?

A
profit = initial payment received i.e. C premium received
loss = - infinite
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12
Q

which positions are considered bullish?

A

buy stock
buy call
sell put

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13
Q

which positions are considered bearish?

A

short selling stock
short selling call
buying put

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14
Q

what is the position for a covered call, what does it aim to do?

A

Position: for every call you short you buy one stock
Aims: to reduce the loss of writing(short selling) a call

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15
Q

what is the position for a protective put, what does it aim to do?

A

Position: for every stock you buy you buy a put
Aims: to reduce your potential loss when you buy a stock

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16
Q

why would you want to create a synthetic put or call?

A

because they may not be traded on the market or the premium may be unacceptable.

17
Q

what is the put call party formula?

A

P + S = C + PV(X)

18
Q

what is a money spread? what are examples of money spreads?

A

taking an options and writing an option at the same time with different exercise prices.

ie bull or bear spread, collars, butterfly spread

19
Q

what is a time (calendar) spread? what is this technique based on?

A

taking an options and writing an option at the same time with different expiration date but same strike.

volatility

20
Q

why do investors use option spreads? 2

A
  • reduce risk

- low costs of long positions

21
Q

what is a bull spread? position and aim

A

position: buy call with X1 and sell call with X2 where X1

22
Q

what is the profit formula for a bull spread?

A

cap pi = N1 (max(0, St-X1) - C1) + N2(max(0, St-X2) - C2)

N2 is negative and C1>C2

23
Q

when does a bull spread breakeven?

A

when St = X1 + C1 + C2

24
Q

what is a bull spread using calls? position and aim

A

position: sell a call with X1 and buy a call with X2 where X1

25
Q

what is the profit formula for a bear spread? using calls

A

cap pi = N1(max (0, St-X1) - C1) + N2(max(0, St-X2) - C2)

the same as bull this time N1 is negative and C1>C2 (make money)

26
Q

what is a bull spread using puts? position and aim

A

position: sell a put with X1 and buy a put with X2 where X1

27
Q

what is the profit formula for a bear spread? using puts

A

cap pi = N1(max (X1-St) - P1) + N2 (max(0, X2-St) - P2)

where N1 is neg and put bought is more expensive than Put sold (cost)

28
Q

when does a bear spread using puts breakeven?

A

St = X2 + P1 - P2

29
Q

what are collars similar to? whats the key difference?

A

bull spreads, the earn more, earn interest on X1

30
Q

what is the position and aim of a collar?

A

position: buy stock and buy put with X1, see call with X2
aim: no initial outlay for options, call premium set so that it offsets the put premium

31
Q

what is the position and aim of a butterfly spread? position and aim

A

position: buy call with X1, buy call with X3, sell 2 calls with X2
aim: speculate that large stock price movements are unlikely.

32
Q

what is the profit equation for a butterfly spread??

A

cap pi = (max (0, St-X1) - C1) - (2max(0, St- X2) + 2C2) + (max(0,St-X3) - C3)

33
Q

what is a straddle? position and aim?

A

position: for every call you long you long a put with the same exercise price.
aim: you know the stock price is going to move but you don’t know in which direction. volatility if greater than what the market is pricing it for

34
Q

what is a short straddle? why is it more risky?

A

position: for every call you short you short a put with the same exercise price.

unlimited loss potential, would only do this if you believed volatility is less than perceived

35
Q

what is a strip? position and aim?

A

position: long 2 puts, long 1 call
aim: double up bet that stock will decrease

36
Q

what is a strap? position and aim?

A

position: long 2 calls, long 1 put
aim: double up bet that stock will increase