Kaplan NASD Series 7 Options Dump Sheet

series Securities Options QuickSheet

TM

7

basic concepts

Basic Options Positions

Equity Option Contract

Position

Premium

If Exercised

Long call (Buy)

Pay out

Right to BUY stock at the strike price

Ex: 1 XYZ January 35 Call @ 2 Premium = 2(100 shares) = $200

Short call (Sell or write)

Receive

Obligation to SELL stock at the strike price

Intrinsic Value

Long put (Buy)

Pay out

Right to SELL stock at the strike price

Short put (Sell or write)

Receive

Obligation to BUY stock at the strike price

■■

1 contract = 100 shares

Premiums ■■

■■

1 point = $100

Difference between strike price and current market value of stock

Ex: XYZ July 40 Call, XYZ stock trading @ 43 Intrinsic value = 43 – 40 = 3

In-, At-, and Out-of-the-Money ■■

An option is in-the-money by the amount of its intrinsic value

Market Attitude

In-, At-, and Out-of-the-Money (Calls) Intrinsic Value

In-, Out-, At-the-Money

40 Call, stock @ 42

2 points

In-the-money 2 points

40 Call, stock @ 40

0 points (stock At-the-money = strike price)

40 Call, stock @ 38

0 points

Ex: Calls

Out-of-the money

In-, At-, and Out-of-the-Money (Puts) Intrinsic Value

In-, Out-, At-the-Money

40 Call, stock @ 37

3 points

In-the-money 3 points

40 Call, stock @ 40

0 points (stock At-the-money = strike price)

40 Call, stock @ 44

0 points

Ex: Puts

Out-of-themoney

Time Value The amount of an options premium that exceeds intrinsic value ■■ Time value = Premium – Intrinsic value ■■

Ex: 1 XYZ July 30 Call @ 3, XYZ Stock trading @ 31 Intrinsic value = In-the-money amount = 31 – 30 = 1 Time value = Premium – Intrinsic value = 3 – 1 = 2 points time value

2010 Series 7 Options.indd 1

Buy

Write

Call

Bull ↑

↓ Bear

Put

Bear ↓

↑ Bull

Calculating Maximum Loss, Maximum Gain, and Breakeven Note: XP = Strike (exercise) price, CMV = Current market value of stock

Basic Positions Position Long call Short call Long put Short put

Attitude Max. Loss Bullish Premium paid Bearish Unlimited Bearish Bullish

Premium paid Breakeven to zero

Max. Gain Breakeven Unlimited XP + Premium Premium XP + received Premium Breakeven XP – to zero Premium Premium XP – received Premium

Ex: Long 1 XYZ July 30 Call @ 3 Maximum loss = Premium paid = 3(100 shares) = $300 Maximum gain = Upside potential (stock could rise to infinity) = Unlimited BE = XP + Premium = 30 + 3 = 33

Straddles Position Attitude Max. Loss Max. Gain Breakeven Long Expect Total Unlimited 2 BEs straddle volatility premiums (long call) (XP + and paid – Total premiums) Short Do not Unlimited Total 2 BEs straddle expect (short premiums (XP + and volatility call) received – Total premiums)

Ex: Long straddle: Long 1 XYZ July 30 Call @ 3 Long 1 XYZ July 30 Put @ 2 Maximum loss = Total premiums paid = 5(100 shares) = $500 Maximum gain = Maximum potential (long call upside) = Unlimited 2BEs = XP + and – Total premiums paid = 30 + 5 = 35 30 – 5 = 25

Spreads Position Attitude Max. Loss Debit Bullish Net debit call paid spread

Max. Gain Difference in XPs – Net debit paid

Breakeven Lower XP + Net debit paid

Credit call spread

Bearish Difference Net credit in XPs – received net credit received

Lower XP + Net credit received

Debit put spread

Bearish Net debit paid

Higher XP – Net debit paid

Credit put spread

Bullish

Higher XP – Net credit received

Difference in XPs – Net debit paid Difference Net credit in XPs – received Net credit received

Ex: Debit call spread: Long 1 XYZ July 30 Call @ 3 Short 1 XYZ July 35 Call @ 1 Net debit paid = 2 Maximum loss = Net debit paid = 2(100 shares) = $200 Maximum gain = Difference in XPs – Net debit paid (35 – 30) – 2 = 3 3(100 shares) = $300 BE = Lower XP + Net debit paid = 30 + 2 = $32

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Hedge Positions (Stock and Option) Position

Attitude Max. Loss Max. Gain Breakeven

Long stock, short call (covered call)

Neutral to slightly bullish

CMV – Premium received

Long stock, Bullish long put

CMV – XP + Premium paid

Unlimited CMV + Premium paid

Short stock, Bearish long call

XP – CMV + Premium paid

CMV – Premium paid

CMV – Premium paid

Unlimited CMV – XP + Premium received

CMV + Premium received

Short stock, short put (covered put)

Neutral to slightly bearish

XP – CMV + Premium received

CMV – Premium received

Ex: Long stock, short call: Long 100 shares XYZ @ 30, Short 1 XYZ Oct. 40 Call @ 2 Maximum loss = CMV – Premium received = 30 – 2 = 28 28(100 shares) = $2,800 Maximum gain = XP – CMV + Premium received = 40 – 30 + 2 = 12 12(100 shares) = $1,200 BE = CMV – Premium received = 30 – 2 = 28 28(100 shares) = $2,800

Non-Equity Options

Tax Rules for Options

Index Options

Closing Transaction

Multiplier for strike prices and premium = 100 ■■ Cash settled, no delivery of underlying

■■

■■

Ex: Long 1 OEX March 450 Call @ 2, OEX Index trading @ 458 at expiration In-the-money amount = CMV – XP = 458 – 450 = 8 When exercised buyer receives 8(100) $800 cash delivery Profit = Amount received at exercise – Premium paid = 8 – 2 = 6(100) = $600 BE = Premium + Strike price = 452 MG = Unlimited (long call) ML = $200 (premium paid)

Debt Options ■■ ■■

Yield-based strike price Premium multiplier = 100

Ex: 1 T-bond 68 Call @ 2 Premium = 2(100) = $200 Yield based XP = 6.8% BE = Premium + Strike price = 70 or 7% MG = Unlimited (long call) ML = $200 (premium paid)

Foreign/World Currency Options Cash settled, no delivery of foreign currency Strike price in cents (except yen, in 1/100th of a cent) ■■ Contract size = 10,000 units of currency (except yen = 1,000,000 units of currency) ■■ ■■

Capital gain or loss when position is closed

Ex: Open position—Buy 1 July 40 Call @ 4 Close position—Sell 1 July 40 Call @ 5 = 1 point gain = $100 capital gain

Expiration ■■ ■■

Capital gain or loss when position expires Gain if short, loss if long

Ex: Long 1 XYZ June 35 Call @ 4 Option expires, buyer loses premium: 4(100 shares) = $400 capital loss Ex: Short 1 XYZ June 35 Call @ 4 Option expires, seller (writer) keeps premium, 4(100 shares) = $400 capital gain

Exercise Cost basis of stock position adjusted when option is exercised ■■ No gain or loss reported until stock position is closed ■■

Ex: Long 1 XYZ Dec. 25 Call @ 3.5 Call is exercised; investor owns XYZ stock at $25 per share Sells stock at $30 per share Cost basis in stock adjusted upward by 3.5 to account for cost of call Cost basis in stock = 25 + 3.5 = 28.5 Stock sold at 30 Sale – Cost (30 – 28.5) = 1.5 point gain 1.5(100 shares) = $150 capital gain

Ex: 1 Canadian dollar April 80 Call @ 2 Premium = 2(100) = $200 XP in cents = .80 BE = Premium + Strike price = 82 or $.82 MG = Unlimited (long call) ML = $200 (premium paid)

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3/17/2010 1:06:41 PM