Analyze Option Components - Securities Industry Essentials SIE

1. Identify the standard deliverable for one listed equity option contract.

   100 shares of the underlying stock. Standard contracts standardize trading by covering a fixed number of shares per option.

2. Which option is at-the-money based on the relationship between $S$ and $K$?

   An option with $S \approx K$. At-the-money status occurs when the underlying price is nearly equal to the strike, yielding zero intrinsic value.

3. Identify moneyness for a put when $S = 55$ and $K = 50$.

   Out-of-the-money. A put is out-of-the-money when stock price exceeds strike, lacking immediate exercise profit.

4. Find time value if premium is $3.50$ and intrinsic value is $2.00$.

   $1.50$. Time value is the premium excess over intrinsic value, calculated as $3.50 - 2.00 = 1.50$.

5. Calculate call intrinsic value if $S = 52$ and $K = 50$.

   $2$. Call intrinsic value is the positive difference between stock price and strike, here yielding $2$.

6. What is time value for an option premium in terms of premium and intrinsic value?

   Time value = premium − intrinsic value. Time value reflects the additional premium beyond intrinsic value due to potential future price movements.

7. What is an option expiration date?

   The last day the option exists; after expiration it is no longer exercisable. Expiration marks the end of the option's life, after which the rights to exercise cease to exist.

8. What is the expiration month for a listed equity option contract?

   The month in which the contract ceases to exist (expires). Listed equity options typically expire on the third Friday of the specified month, defining the contract's lifespan.

9. What is the settlement style of most listed equity options at exercise?

   Physical settlement (delivery of shares). Physical settlement requires actual transfer of the underlying shares upon exercise for equity options.

10. What is the exercise settlement amount for a cash-settled option at expiration?

    The in-the-money amount based on the settlement value versus $K$. The amount paid in cash settlement equals the option's intrinsic value at expiration based on settlement price.

11. What does it mean to exercise an option?

    To use the right to buy (call) or sell (put) the underlying at $K$. Exercising invokes the contractual right to transact the underlying at the predetermined strike price.

12. Calculate intrinsic value for a call if $S = 39$ and $K = 40$.

    $0$. Intrinsic value is zero for an out-of-the-money call where stock price is below strike.

13. Which option is in-the-money when $S > K$?

    A call option. A call is in-the-money when the underlying price surpasses the strike, offering immediate exercise value.

14. Identify moneyness for a call when $S = 45$ and $K = 50$.

    Out-of-the-money. A call is out-of-the-money when stock price is below strike, offering no intrinsic value.

15. Identify the strike price if the option is quoted as "XYZ $40$ call."

    $40$. Option quotes specify the strike price directly in the naming convention for clarity.

16. Which option is in-the-money when $S < K$?

    A put option. A put is in-the-money when the underlying price is below the strike, providing exercise profitability.

17. What is intrinsic value for a put option?

    $\max(0, K - S)$. Intrinsic value quantifies the exercise benefit for a put when the strike exceeds the stock price.

18. Calculate the dollar cost of 1 equity option contract if premium is $2.25$.

    $225$. The cost multiplies the per-share premium by 100 shares in a standard contract.

19. What is the option premium?

    The price paid by the buyer and received by the writer for the option. The premium compensates the writer for the obligation and grants the buyer the right to exercise the option.

20. Calculate put intrinsic value if $S = 48$ and $K = 50$.

    $2$. Put intrinsic value is the positive difference between strike and stock price, resulting in $2$.

21. What does it mean for an option writer to be assigned?

    The writer must fulfill the contract due to an exercise by a holder. Assignment obligates the writer to perform the contract terms upon the holder's exercise decision.

22. What is intrinsic value for a call option?

    $\max(0, S - K)$. Intrinsic value measures the immediate exercise profit for a call when the stock price exceeds the strike.

23. Calculate the dollar proceeds for writing 1 equity option contract at $1.10$ premium.

    $110$. Proceeds for writing are the premium received, scaled by 100 shares per contract.

24. What is cash settlement for an option at exercise?

    Settlement by paying the in-the-money amount in cash rather than delivering shares. Cash settlement simplifies exercise by exchanging the monetary difference without physical asset delivery.

25. What does an option strike price represent?

    The price at which the underlying can be bought (call) or sold (put). The strike price determines the fixed price for exercising the option to buy or sell the underlying asset.

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