Options
credit put spreads
-Bullish -created by investors to reduce the risk of a short put position -Narrow
Contracts are issued with
100 shares (remember to multiply premium by 100)
To create a credit calendar spread, an investor should buy the near expiration. buy the distant expiration. sell the near expiration. sell the distant expiration.
A credit calendar spread occurs when premium received exceeds the amount paid out. An investor creates a credit spread by selling the distant expiration and buying the near expiration. The distant expiration has more time value, and therefore, a higher premium.
An investor buys an ABC May 45 put at 4.25 when the stock is trading at $43. The put is in the money when the stock is
A put is in the money when the underlying stock trades below the exercise price of the put. The put is in the money by two points.
The premium on the XYZ Jan 30 calls is 3 - 3.15, while the premium on the XYZ Jan 30 puts is quoted at 2.25 - 2.35. A customer establishing a short straddle receives total premiums of
As is the case with most securities, a price quote includes two prices. The first is the bid price (the highest price someone is willing to pay), and the second is the ask price (the lowest price someone will accept to sell). To establish a short straddle, the customer sells a call and a put at the bidprice. The premiums received are $300 (the bid price) for the call and $225 (the bid price) for the put, for a total of $525. If the question asked about a long straddle, the investor would be buying the options and would pay a total of $550 ($315 for the call; the ask price) and $235 for the put; the ask price).
If a customer is long 1 GGZ Oct 50 call at 11 and short 2 GGZ Oct 60 calls at 5, the maximum loss potential is
Because the customer is short 2 calls and long 1 call, one of the short calls is uncovered. The loss potential for a naked call writer is unlimited on the upside.
What is the breakeven point on the following position? Buy 1 QRS Jan 40 call at 2.35 Write 1 QRS Jan 45 call at 0.85
Because this is a call spread, the breakeven point is calculated by adding the net premium of 1.50 to the lower strike price (40 + 1.50 = 41.50).
Which of the following would protect a short May 50 put?
For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration. This ensures the investor may sell the stock without financial loss if the short put is exercised, and she is forced to buy.
A customer, long 100 shares of ABC at 73, writes 1 ABC Apr 75 call at 2 to generate additional income. ABC stock subsequently moves higher, at which time, the customer is exercised. For tax purposes, which of the following statements are true? Cost basis is $73 per share Cost basis is $71 per share Sales proceeds are $75 per share Sales proceeds are $77 per share
If a covered call writer is exercised, cost basis (for tax purposes) is the cost of stock purchased. Sales proceeds are adjusted (strike price plus premium) to reflect the premium received.
If your client was recently approved to trade options and writes 1 XYZ Oct 60 put but fails to return the signed option agreement within 15 days of account approval, which of the following orders could you accept?
If a customer fails to return a signed options agreement within 15 days of account approval, your firm can permit closing transactions only. While the customer may offset her existing position, she may not offset a short position in an Oct 60 put by buying an XYZ put with a different expiration month and/or a different strike price.
The price of DFEC common stock is $32 per share. Your customer owns one DFEC Sep 35 put purchased for a premium of 4. The option
If an option has intrinsic value, it is in-the-money. Puts are in-the-money when the market price of the underlying asset is below the exercise price. The difference between the 35 strike and the 32 current market value represents 3 points of intrinsic value. Intrinsic value (the in-the-money amount) ignores the premium. However, the fact that the premium exceeds the intrinsic value by one point represents one point of time value.
A client purchased 500 shares of JSSP common stock at $28 a share in July of 202X. The following June, the client wrote 2 October 35 calls at 5 each against the stock position. If the market price of JSSP was $39 at expiration, what was the client's realized gain?
Investors have a gain or loss only upon the sale of an asset. In this case, the only shares involved are the 200 shares covering the two short call options. The investor paid $5,600 ($28 times 200 shares). With the stock selling at 39 at expiration date of those two calls, they will be exercised because they are 4 points in-the-money. That means the investor will receive $7,000 ($35 times 200). The investor adds to that the $1,000 premium ($500 times 2) when the calls were written. The total credit to the account is $8,000. That is $2,400 more than the $5,600 the investor paid for those 200 shares. See the T-chart below. Bear in mind that although the customer was long 500 shares of JSSP stock, only two (covered) calls were written. When the market price reached 39 at expiration, the two calls were in-the-money and were exercised; however, the customer was not obligated to sell the remaining 300 shares of stock and there was no indication in the question that the customer liquidated the entire position
A client purchased 500 shares of JSSP common stock at $28 a share in July of 202X. The following June, the client wrote 2 October 35 calls at 5 each against the stock position. If the market price of JSSP was $39 at expiration, what was the client's realized gain?
Investors have a gain or loss only upon the sale of an asset. In this case, the only shares involved are the 200 shares covering the two short call options. The investor paid $5,600 ($28 times 200 shares). With the stock selling at 39 at expiration date of those two calls, they will be exercised because they are 4 points in-the-money. That means the investor will receive $7,000 ($35 times 200). The investor adds to that the $1,000 premium ($500 times 2) when the calls were written. The total credit to the account is $8,000. That is $2,400 more than the $5,600 the investor paid for those 200 shares. See the T-chart below. Bear in mind that although the customer was long 500 shares of JSSP stock, only two (covered) calls were written. When the market price reached 39 at expiration, the two calls were in-the-money and were exercised; however, the customer was not obligated to sell the remaining 300 shares of stock and there was no indication in the question that the customer liquidated the entire position.
An investor purchased 100 shares of Paradigm Publishing Corporation (PPC) on October 17, 2020. The price was $83 per share. On April 11, 2021, the investor wrote one PPC Nov 85 call for 3. At expiration date, the PPC stock is selling for $90 per share, and the investor liquidates the stock at the market price and closes the option at its intrinsic value. The net tax consequences are
Let's take the positions one at a time. The stock is purchased for $83 and sold for $90. That is a $700 long-term gain (Oct 2020 to Nov 2021). The option is sold for $300 and closed (bought back) at the $5 intrinsic value (the difference between the 85 strike and the 90 market) for a short-term capital loss of $200. The net of the two (+700 and -200) is a $500 long-term capital gain. If you thought that writing the call when the stock's holding period was still short-term had an impact, you were thinking of the effect of buying a put on stock held short-term. Buying or selling a call does not affect the holding period of the underlying stock.
debit spread
Long option has a higher premium than the short option
Put OTM
MP greater than strike
Put ITM
MP is less than strike price buyers benefit, sellers do not
Call OTM
MP less than strike good for sellers
Call has intrinsic value when
Mp above strike
Which of the following are fair and equitable methods for the assignment of options contracts by a brokerage firm to a customer?
Options Clearing Corporation (OCC) rules allow broker-dealers to assign customers using first-in, first-out or random selection methods. In addition, the OCC also states that any other fair method is allowed.
Class
Same type of option same underlying security
If a customer sells short 100 XYZ at 79 and simultaneously writes 1 XYZ Jan 80 put at 5, the maximum gain potential is
Short stock combined with a short put is an income strategy that carries unlimited loss potential. Although gain will occur if the stock moves downward, the customer wrote an in-the-money put that will be exercised, forcing the customer to buy stock at $80 for a $100 loss on the stock shorted at $79. However, the customer received $500 in premiums, resulting in an overall gain of $400. Breakeven for short stock-short put is the short sale price plus the premium. In this case, breakeven is 84, and maximum gain is four points—from 84 to 80.
If a customer buys 100 XYZ at $52.50 and buys 1 XYZ Aug 50 put at 1.50, what is the customer's maximum possible loss?
Stockholders often buy puts to protect long positions. In this case, if the stock falls below 50, the investor will exercise the right to sell it at 50. The loss on the stock is limited to 2.50, which, combined with the premium paid of 1.50, results in a $400 loss.
A customer is long an ABC Apr 40 call and is short an ABC Jul 40 call. Which of the following best describe his position? Bullish Bearish Calendar spread Vertical spread
The July call will have a higher premium than the April call because it has more time value. Because the customer is selling the call with the higher premium, he is counting on the July call to go unexercised, which would allow him to keep the premium as a profit. That means the market value of the underlying security must either stay the same or decline. Therefore, this customer's position is bearish. Because the options expire in different months, the trade is a calendar spread.
If LEAPS options positions are maintained for more than 12 months, which of the following statements are true? The LEAPS writer's gains are taxed as short-term gains. The LEAPS writer's gains are taxed as long-term gains. The LEAPS buyer's gains are taxed as short-term gains. The LEAPS buyer's gains are taxed as long-term gains.
The LEAPS writer's premium is taxed as a short-term gain. The LEAPS buyer took a position for longer than 12 months, so any profits are considered long-term capital gains. The writer's gain is short term because by opening with a sale, a holding period is never established.
Several years ago, an investor purchased 100 shares of XYZ stock at $50 per share. XYZ is now trading at $90. Although the investor is still bullish on the stock, there is a concern that there might be a retreat after the next earnings report is released. Which of the following options strategies would provide some downside protection at no cost to the investor?
The best downside protection would come from buying the XYZ 90 put. However, buying the put would mean paying a premium and the question specifies "at no cost." That leaves the two short choices as the only possibilities. When you are long the stock, writing a covered call produces income. The income protects the downside to the extent of the premium received. Writing a put will also generate income. However, if the stock price goes down (something the investor is concerned about), the put will be exercised and the investor will have to buy an additional 100 shares at the strike price. Therefore, this position does not offer any downside protection.
A customer shorts 1 OEX (S&P 100) 935 call at 7. If the customer is assigned an exercise notice on the call when the OEX closes at 944, the customer realizes
The call is in the money by 9 (944 − 935). The writer must deliver cash to the buyer equal to the intrinsic value (the 9 point difference between the 935 strike and the 944 index value). To determine the investor's profit or loss, the intrinsic value is reduced by the premium paid (9 − 7 = 2). With each index point being worth $100, the investor has a loss of $200 because the money paid on exercise exceeded the premium received.
Your client's position is Long 1 CYR DEC 120 call at 4 Long 1 CYR DEC120 put at 3 Long 100 CYR purchased at 120 If the current market price of CYR is 120, what is the client's maximum possible loss?
The client owns 100 shares of CYR at a cost of $120 per share or $12,000. The client is also long a CYR straddle (a put and a call on the same stock with the same strike price and expiration date). The total premium paid for the straddle is $700 ($400 for the call plus $300 for the put). The maximum possible loss when an investor owns stock occurs when the stock's market price falls to zero. If that happened to the CYR stock, the client would be able to exercise the put option and deliver the stock at the strike price of 120 ($12,000). With the market price below the strike price of the call, the call option expires unexercised. That makes the math $12,700 cost (the cost of the stock plus the premiums for the straddle) minus the $12,000 realized when the put is exercised for a maximum loss of $700.
An investor buys 2 RST 40 calls and pays a premium of 4 each. He also buys 2 RST 40 puts and pays a premium of 2.50 each. When purchased, RST is trading at $40.75. On the expiration date, RST is trading at $32.50, and the investor closes his positions for intrinsic value. Excluding commission, the investor realizes
The cost of opening these two straddles is $1,300. On the expiration date, the puts have an intrinsic value (in the money amount ) of $750 each. A put option is in the money when the market price is below the strike price ("put down" rule). With a current market price of $32.50 and a strike (exercise) price of $40, the option is in the money by 7 1/2 points. Two puts with an intrinsic value of $750 each represents a total of $1,500 of gain to the investor. When comparing this to the investor's cost ($800 for the 40 calls and $500 for the 40 puts = $1,300), the result is a $200 profit. The calls will expire worthless. Alternatively, the breakeven points for this long straddle are 33.50 and 46.50 (add the combined premiums of 6.50 to the call strike and subtract combined premiums from the put strike). The investor profits in a long straddle when the stock moves outside the breakeven points. As the stock is at 32.50, the customer makes 1 point (33.50 − 32.50) on each straddle, resulting in a $200 profit.
A customer buys 200 XYZ at 32, 2 XYZ JUN35 calls at 3, and 1 XYZ JUN 35 put at 6.50. Two months later, the customer purchases 1 XYZ JUN 35 put at 4. Before expiration, with XYZ trading at 37, he sells his stock and closes his calls at 2.10 and his puts at 0.25 for
The customer opens four positions with debits to his account: 200 shares at $32 per share equals a debit of $6,400; two calls at $300 each equals $600; one put at $650 equals a debit of 650; and finally, an additional put at $400. Let's do the math on this. The total cost of the purchases is $6,400 + $600 + $650 + 400 = $8,050. The stock position is sold for $37 per share for a credit of $7,400. The calls are closed for 2.10 each (a credit of $420), and the puts are closed for a credit of $25 each. The proceeds from the sales are $7,400 + $420 +$50 = $7,870. The difference between the cost ($8,050) and the proceeds ($7,870) represents a loss of $180.
An investor opens the following options position: Buy 1 BOB Jan 60 call @4; Buy 1 BOB Jan 55 put @2½. What is the investor's maximum gain, maximum loss, and breakeven point?
The first step is to identify the position. This is a long combination—a long put and a long call with different terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the combination (the two premiums totaling $650). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($60 + $6½ = $66.50) and subtract the premium from the strike of the put ($55 ‒ $6½ = $48.50).
An investor opens the following positions: Sell short 100 shares of BAF @61; short 1 BAF Sep 60 put @3¼. What is the customer's maximum gain, maximum loss, and breakeven point?
The first step is to identify the position. This is a short sale of stock and a sale of a put option. The sale of the put provides some income and offers protection only to the extent of the premium. Short sellers want the stock's price to decline. They lose when it rises. The investor has received $6,425 ($6,100 from the sale of the stock and $325 from the sale of the option). That makes the breakeven point $64.25 per share. Once the price of the BAF stock goes above that, the investor loses money. Because there is no limit as to how high the stock's price can go, the maximum loss is unlimited. If, on the other hand, the stock's price declines into the 50s or lower, the owner of the 60 put will exercise and our investor will pay $6,000 to purchase the stock. That stock will be used to cover the short sale. That means the investor sold the stock (short) at $61 and bought it back at $60 for a gain of $100. At that point, the investor's profit is the $325 from the premium on the sale of the put plus the $100 gain (the difference between 61 and 60). That is why the maximum gain is $425. Why doesn't the breakeven follow the "put-down" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.
Which of the following transactions in the same security will affect the holding period of a security held for 12 months or less? Buy a put Buy a call Sell short Sell a put
The holding period of a capital asset is based on the amount of time the asset is held at risk. When there is no longer the possibility of a loss, there is no longer any risk. Buying a put or selling short effectively removes the risk from a transaction and destroys any short-term holding period. The short-term holding period will not become a long-term holding period for tax purposes, as long as the offsetting position (put or short) is maintained.
A customer buys 1 XYZ Dec 30 call at 7 and sells 1 XYZ Dec 40 call at 1. Two months later, if the customer closes the positions when the spread is trading at 9 points, the customer has
The investor established a debit spread and paid a net premium of $600 (7 − 1). The spread widened to 9, giving the investor a profit of $300 (9 − 6). Debit spreads are profitable if the spread between the premiums widens.
If an investor with no other positions buys 2 DWQ Jun 45 calls at 3, and he exercises the calls when the stock is trading at 47.25 and immediately sells the stock in the market, what is the investor's profit or loss?
The investor exercised the right to buy the stock for 45, and can sell the stock in the market for 47.25 for a gain of 2.25. The gain of 2.25 minus the premium of 3 gives the investor a loss of 0.75 per share. Multiplying the 0.75 loss by 200 (the number of shares) results in a loss of $150
A customer wishes to close a short option position. The order ticket must be marked as
The investor opened with a sale, so the position must close with a purchase.
If a customer buys 500 shares of ABC at 48 and writes 5 ABC 50 calls at 2, what is the maximum loss?
The investor pays $48 per share for the stock and receives $2 for selling the calls. That means the investor's out of pocket cost is $46 per share ($48 minus $2). The worst that can happen is the stock becomes worthless. In that case, the option will expire unexercised (who wants to buy stock at 50 when it is worth $0?). With a maximum potential loss of $46 per share and owning 500 shares, the total loss could be as much as $23,000 ($46 times 500).
An investor purchased 100 shares of RIK common stock at $150 per share on June 17, 2019. On July 11, 2020, with the RIK selling at $180, the investor hedges by purchasing one RIK Oct 165 put at 2.50. Immediately prior to the expiration date, RIK is selling for $145 per share and the put option is exercised using the long stock for delivery. This would result in
The investor purchased a protective put against a long position that had a long-term holding period (almost 13 months). That means that the holding period of the stock is not affected by the purchase of the put. Therefore, this investor's gain will be long term. The gain is the difference between the cost and the proceeds. When exercising a put, the cost of the stock is the investor's cost basis. The exercise price minus the option premium paid is the sale price. In our question, the cost is the $150 initial purchase price ($15,000 total). The sale price is the 165 strike minus the $2.50 premium, or $162.50 per share ($16,250). That results in a long-term capital gain of $1,250.
The manager of a portfolio that consists predominately of large- and mid-cap stocks could hedge against a market downturn and generate additional income by
The only way to generate income through the use of options is to sell them. If concerned that the market may fall, selling calls is the appropriate strategy.
An investor writes 1 IBS 280 put for 16.60. The position is closed, and the put is bought for its intrinsic value when IBS is trading at 265.25. The investor realizes
The opening sale of the IBS put was made for 16.60, and the closing purchase was made for the intrinsic value of 14.75. The put's intrinsic value is determined by how far the stock's market price is below the strike price. (In this case, 280 minus 265.25.) 16.60 − 14.75 = 1.85 × 100 shares = $185.00. The investor profits because the sale's proceeds exceed the purchase price.
Which of the following actions could affect the holding period on a long position in IBS stock?
The purchase of a put affects a stock's holding period when the stock has been held short term. The holding period begins anew once the put position is closed.
The derivative-based strategy known as portfolio insurance involves
The purchase of a put option to hedge the downside risk of an underlying security holding is called a protective put position, one of many derivative-based strategies collectively known as portfolio insurance.
credit spread
The short option has a higher premium than the long option
One of your customers takes a short position in 300 shares of LOP common stock. The sale price is $70 per share. One month later, with the stock selling at $73 per share, the investor purchases 3 LOP Sep 75 calls at a premium of 3.25. What is the investor's breakeven point?
This customer is looking for the price of the stock to decline. The proceeds of the sale were $70 per share and the cost of the "insurance" (the call option) was 3.25. That means that the customer will not start making money until the stock falls below proceeds minus cost or 66.75. In a question like this, the current market price of the stock and the strike price of the option are irrelevant. Breakeven on short stock and a long call position is the proceeds minus the premium. As is always the case when computing breakeven, the number of shares and number of option contracts is meaningless breakeven is the same price for one or one thousand.
An investor has a diversified portfolio of common stock with a market value of $1.7 million and a beta of 1.20. If the OEX (S&P 100) is currently quoted at 680, to protect the portfolio against a decline in value, the investor's best strategy is to buy
This investor has a broad-based portfolio with a market value of $1.7 million and wants to protect against a possible downturn in the market. First, the investor's most effective strategy to hedge against a possible market downturn would be to buy puts. If the market does turn downward, the loss on the portfolio would be offset by a gain on the puts. Second, you need to determine the number of put contracts the investor needs to purchase in order to cover (hedge) the $1.7 million portfolio. The math is basically the same as if the question had said the investor owns 1,000 shares of a stock and want to buy puts to hedge. With each put hedging 100 shares, you would have to buy 10 puts. In this case, the math is as follows. You are told OEX is trading at 680, therefore each contract has a value of (680 x 100 = 68,000). In order to hedge a $1.7 million portfolio the investor would need to buy 25 OEX contracts ($1.7 million ÷ $68,000). A portfolio with a beta of 1.2, means it is 20% more volatile than the market (S&P 100), so the investor needs 20% more protection. Therefore, because the portfolio has a beta of 1.2 an additional 20% is required (1.2 x 25 puts = 30 puts).
John purchased a DMF May 90 call and simultaneously sold a DMF Jun 80 call. Which of the following best describes John's position?
This investor has established a net credit diagonal call spread. He bought the lower premium call (higher strike and earliest expiry) and sold the higher premium call (lower strike and longest expiry). He hopes the spread will narrow to zero (if the market falls below 80 and both calls expire worthless) so he can keep all of the premiums. He is a bear, and so is the spread.
A customer goes long an MMM Jan 40 put at 5 and writes an MMM Jan 50 put at 13. The customer will break even or profit when the market price is at all of the following except
This is a bull spread; the investor wants the stock to rise. Breakeven for put spreads is computed by subtracting the net premium (8) from the higher strike price (50). If it stays above the breakeven price of $42, they will profit.
If a customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58, what is the maximum risk?
This is a credit spread. The maximum loss is the difference between the strike prices and the net credit. In this example, the strike price difference is 15 (65 - 50) and the net premium is 9 (10 − 1), or 15 − 9 = 6 × $100 = $600 maximum loss. The maximum gain is the net credit of $900. Credit put spreads are bullish (buy the low strike, sell the high strike). If the stock's price should rise above $65 per share, both options expire worthless (who wants to sell stock at $50 or $65 when the price is above that). If the investor is wrong and the stock price falls below $50, the short put will be exercised and the investor will have to buy the stock at $65 per share. Now that the stock is owned, it can be used to exercise the long put and be sold at $50 per share. That $15 difference between the 50 and 65 strikes is the largest spread possible. Comparing the loss of $1,500 to the initial credit of $900 proves that the maximum risk of loss is $600.
If a customer buys 1 XYZ Jan 40 call and 1 XYZ Jan 40 put, paying total premiums of $650, and XYZ becomes worthless, the result is
This is a long straddle in which breakeven points are established by adding and subtracting the combined premiums (6½ points) from strike (breakeven points are 46½ and 33½). The customer makes money if the stock moves above 46½ or below 33½. As the stock becomes worthless, the customer earns a 33½ point gain on 100 shares, or $3,350. Let's do the math. When a stock goes down, the owner of a put option benefits ("put down"). In this question, if the stock is worth zero, the owner of the put can purchase it for nothing and sell the stock for $40 per share by exercising the 40 put. That looks like a $4,000 profit except the investor had to pay for both the put and the call. We are told the total premiums are $650, so the profit is reduced by that cost: $4,000 minus $650 equals a profit of $3,350. What happens to the call option? Calls are worth something only when the stock goes up, so that option will expire worthless.That's the key to a long straddle. This investor doesn't know which way the market price will go, so a position is taken on both sides, sort of like straddling a fence. If the stock price goes up, the call will become valuable and if it goes down, as in this question, it is the put that becomes valuable. LO 10.h
A client writes 1 Jan 60 put and buys 1 Jan 50 put. This is
This is a put credit spread, and bulls sell puts. The 60 put is worth more because it has a higher strike price. Long the lower put is bullish; short the lower put is bearish.
Long an ABC Apr 60 call and short an ABC Apr 70 call is
This is a vertical spread, not a calendar spread. To determine whether it is a net credit or debit, look at the strike prices. For call options with the same expiry month, the lower strike price will always have a higher value. In this case, the investor is long the higher valued option, which gives a net outflow of cash to enter the entire position. (More money was spent on the lower strike price call than received for the higher strike price call.) Therefore, the investor has a net debit for her account.
A client buys 1 Jul 50 call and writes 1 Jul 60 call. This is
We have to answer two questions: is this a bull or bear spread, and is it a debit or credit spread? Looking at the first question, the goal of a bull is to always buy low and sell high. In the case of options, that refers to the strike prices (not the premiums). In this question, the purchased option has a 50 strike, and the sold option has a 60. That looks like buy low/sell high, so this is a bull call spread. But how can we determine if this is a debit (more money out than in) or a credit spread (the reverse) when the premiums are not shown? Simple. What would you pay more for? The option to buy stock at $50 per share or buy it at $60 per share? When it comes to a call option, the cheaper it can be exercised, the more valuable the option. So, the premium for the $50 call must be higher than the $60. If that is so (as it must be), then the investor is spending more to buy the 50 than is being received when selling the 60. More money out than in is a debit spread.
Due to a distribution of stock, the contract size in the JGH Oct 50 call options is 108. A customer purchasing one of these contracts for a premium of 2½ would expect to pay
With a contract size of 108 shares (likely from an 8% stock dividend) and a premium of $2.50 per share, the total cost is $270. Regardless of the reason for the contract size being other than 100 shares, the price paid for an option is always the premium multiplied by the number of shares in the contract. In this question, that would be a premium of $2.50 per share (2½) times 108 = $270.00.
An investor purchased an XYZ Oct 50 call for a premium of 4. On the expiration date, XYZ is selling for 62, and the investor closes the position at the option's intrinsic value. For tax purposes, the investor has realized
With the stock selling at 62, a 50 call has intrinsic value of 12 points (call-up rule). That would represent proceeds of $1,200 to the owner of the call. Subtracting the $400 cost results in a short-term capital gain of $800. How do we know it is short term? Unless the question specifies LEAPS, all options have a maximum term of nine months. Why isn't $800 of ordinary income correct? Aren't short-term gains taxed at ordinary income rates? Yes, they are, but the IRS (and the test) characterize these option trades as capital gains.
time decay
as expiration date approaches, time value decreases
are call writers bearish or bullish or neutral
bearish or neutral
debit call spreads
bullish reward is limited want net debit spreads to widen because profits occur if exercised
Combos
call and put with diff strike, exp, or both
straddle
call and put with same strike and exp
options that are at the money or out of the money
have intrinsic value of 0
strike and premium relationship for puts
higher strike, higher premium
how to cover short call
long call with same or lower strike price and expiration date
relationship between premiums and strike
lower the strike, higher the premium
Call ITM
mp is greater than the strike price buyers like ITM, sellers do not
credit spread
profitable when credit=narrow=expire
debit put spreads
reduce cost of long put position
series
same class, exercise price, exp month
breakeven for put
strike minus premium
breakeven pt for call
strike plus premium
An option has time value when
the premium is greater than its intrinsic value
credit call spreads
used by bearish investors to reduce risk of a short position
Collars
used to protect unrealized gain on long stock
