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Futures & Options Exam 3

Terms in this set (78)

the right but not the obligation to buy or sell a futures contract at some predetermined price at anytime within a specified time period
option
the option to buy a futures contract
call
if a call option is exercised, what futures position does it give you
long
the option to sell a futures contract
put
if a put option is exercise, what futures position does it give you
short
if you think price of futures contracts will rise, what should you do
buy a call
if you think price of a futures contract will fall, what should you do
buy a put
how is short-hedging and buying a put similar
protects against price falls and provides a price floor
what are option sellers called
writers
who gets the premium from the option buyer at the time of the transaction
option sellers
cost of buying an option
premium
what 2 factors drive how high the time value is
volatility of futures
time to maturity of options
what affects the premium
supply and demand
traded by open market auctions & on the pit floors of the CBOT and CME
options
predetermined price at which the buyer of a CALL option can buy the underlying futures
predetermined price at which the buyer of a PUT option can sell the underlying futures contract
exercise/strike price
what must the write do if an option buyer chooses to exercise the option
take the opposite futures position at the strike price
when current futures prices = the options strike price
at the money
if the option is exercise it could make immediate profit
in the money
when the option is currently worthless, if exercise it would put you in a losing futures position
out of the money
in the money CALL, where are future prices in relation to strike prices
futures are above the strike
in the money PUT, where are future prices in relation to strike prices
futures are below the strike
out the money CALL, where are future prices in relation to strike prices
futures are below the strike
out the money PUT, where are future prices in relation to strike prices
futures are above the strike
what 3 things can happen when you buy CALL or PUT
expire
exercise
offset
to ___ a contract, sell it at the current market premium
offset
2 things that effect premium
intrinsic value
time value
formula for intrinsic value for CALL option
i.v. = current futures price - strike price
formula for time value for both CALL and PUT
t.v. = current premium - i.v.
formula for intrinsic value for PUT option
i.v. = strike price - current futures prices
what 4 things effect time value
black scholes
time to maturity
volatility of contract
interest rates
the further away an option is from contract maturity the higher the premium
time to maturity
the more ____ the futures price is the higher the premium for either CALL or PUT
volatile
measure the amount by which an option premium changes with respect to a change in underlying futures price
option delta
the option deltas for calls
0-1
the option deltas for puts
-1 - 0
last trading day is the final day an option can be bought or sold
option expiration
intrinsic values can never be less than
0
the likely hood of the option becoming profitable
time value
formula for profit
sell - buy - premium
formula for premium
intrinsic value + time value
exercising a long put option initially gives you
short futures position
to offset an existing long call position, an option trader must do what
sell a call
T or F: a call option is out of the money when the futures price is below the option's strike price
true
T or F: put options are said to be at the money when futures are trading at the put's option's strike price
true
T or F: the seller of a call option has the right to sell futures at the strike price
false
how would a corn farmer concerned about falling corn prices form a price floor
buy corn put options
a PUT buyer wants prices to do what
decrease
a PUT seller wants prices to do what
never fall below the put's strike price
in the money put option premiums increase if
the futures price decreases
higher futures price volatility tends to lead to
high put and call premiums
T or F: as a speculator if i think corn prices will increase i should be able to make money by buying a put option
false
to form a price ceiling a hedger would have to
buy calls against an anticipated cash purchsae
T or F: the buyer of a put option has the right to sell futures contracts at the strike price
true
T or F: traders who only offset options positions are forced to take a position in the underlying futures contract
false
if you sell a put option and receive a premium of 30 cents, what's the most you can lose
your potential loss is unlimited
T or F: a trader who buys options is not required to post an initial margin position with a broker
true
T or F: the strike price of an options contract does not change
true
T or F: the premium of an options contract changes
true
T or F: if an option still has time value a trader will typically make more money by offsetting rather than exercising
true
which speculative strategies has the most risk
selling at the money calls
to hedge a cash sale of corn in three months, a farmer coul
buy corn put outputs
a price ceiling may be established by
buying call options on the input
how would a trader form a long-straddle options position
buy a call and buy a put option at the same strike price
exercising a long call option gives you
a long position in the futures commodity
a cattle feedlot operator is worried about rising corn prices, what should he do
buy call option contracts
T or F: traditional options contracts exist for the same delivery months as futures contracts
true
if you sell CALLS what are you betting will happen to the underlying futures price
futures price will decrease or stay the same
A speculator believes corn futures prices will increase over the next few weeks. Assuming he is correct, which of the following strategies would make him the most money
buying corn call options
T or F: time value is zero at options contract expiration time
true
T or F: short options positions calls or puts have potentially unlimited losses
true
how would the buyer of an input form a price ceiling
buy calls
T or F: the time value of an option is typically higher for option contracts with deferred delivery periods compared to options contracts with nearby delivery periods
true
if market volatility increases, the time value portion of the option ____
increases
would a trader make more money offsetting an option that still has time value or exercising it
offsetting
the amount of money that could be currently realized by exercising an option with a given strike price
intrinsic value
the time value of an option is typically greatest when an option is
at the money
if market volatility increases, the time value portion of the option
increases
upon exercise, the seller of a call
acquires a short futures position
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