Pass the 7 Chapter 4

An option is a bet between a buyer and seller on the direction of the price on a particular stock.

The buyer always pays the seller a premium. Buyers have rights, sellers have obligations.

The price of an option at which the buyer has the option to buy or sell a particular stock to the seller/writer for.

A call gives the buyer the right to buy an underlying stock for a particular price at any time up through the expiration date. Call buyers are betting that the stock's market price will go up. "Bullish"

Any time a put/call has a market price that is lower/higher than that of the strike price.

There are only two types of value that an option can posses: intrinsic value & time value. Intrinsic value is another way of stating how much higher the stock price is compared to the strike price of a call. (or the opposite for a put) The time value simply means that the option could become more valuable given the amount of time still left before expiration.

CALL Strike Price (SP) + Premium (P) = Break Even (BE) PUT SP - P = BE Buyers & sellers of call & puts both break even at same point.

Buyers maximum gain is unlimited and their maximun loss is the premium.

Sellers maximum gain is the premium and their maximum loss is unlimited.

Whenever you buy or go long... (money out of your pocket)

Whenever you sell or go short... (money into your pocket)

Exercise: Stock is involved as the buyer excersizes his right to buy or sell at the option price. Close position: No stock is involved in this case. The buyer or seller simply trades the option, closing his option. Expire: The option time limit runs out and it is now deemed worthless.

They expire in 9 months or sooner

Long term options 12-39 months

Long, holder, owner