| What is the 4 advantage of Options | Flexibility for profit in any type of market
Increase rate of return on your portfolio
Minimize capital requirements
Generate income on stock you own |
| What is the 3 disadvantage of Options | Limited by Time
High risk of losses
Complicated |
| What are the 3 Reasons for Rule #1 people to use Option trading | To enter a long term investment of a wonderful company = ROP
To exit a long term investment of a wonderful company = ROC
To generate cash on a monthly basis = credit spread |
| What are Options? | Options are contracts between 2 parties that are bought or sold at a price agreed by both parties (the premium) |
| If Options are contract, what does this contract define? | The right or the obligation to buy or sell shares at a specific price for a specific time |
| Can the buyer or the seller get out of the contract at any time and if Yes, How? | yes, by closing the trade when paying or collecting the premium price at the time of the action |
| How many types of Options there is? | Only 2
The Puts Options
The Calls Options |
| How many things can we do with Put and Call Options? | Only 2
We can buy a Put or a Call Option
We can sell a Put or a Call Option |
| The Seller of an Option receive money (he is the Seller), but for what ? | The Seller receives money / is GETTING PAID for an obligation to Buy (PUT) OR Sell (Call) |
| The Buyer of an Options pays money (he is buying), but for what? | The Buyer of an option pays money for a right to Buy or Sell |
| What does Short means in Investing? | It means Sell or Selling - people are selling |
| What does Long means in Investing? | It means Buy / Buying - people are buying |
| What are the 3 characteristics of a Market Order? | Guaranteed to get filled
No guarantee on the price, just market price
Therefore limited control |
| What are the 3 characteristic of a Limit Order | Guaranteed to get our desired price or better
Not guaranteed to be filled
But full control on the price |
| With a Market order the Seller get the Bid or the Ask? | The Seller gets the Bid price
The Buyer gets the Ask price |
| What is the Mark? | It is the half way point between the Bid and the Ask |
| How to calculate the Premium? | Intrinsic Value + Extrinsic Value = Premium |
| Intrinsic Value is the part of the premium, which concern whom the most? | It concern the buyer the most |
| How to calculate the intrinsic value on the PUT side? | Strike price - Stock price = Intrinsic Value on PUT side |
| How to calculate the intrinsic value on the CALL side? | Stock price - Strike price = Intrinsic Value on CALL side |
| Extrinsic Value account for 2 things, which are NOT intrinsic. What are they? | Implied Volatility (emotion / fear going on in the market) + Time Decay = Extrinsic Volatility |
| Extrinsic Value are which type of premium? | 100% OTM premiums |
| What is time decay in option contract? | Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an option's time to expiration draws closer since there's less time to realize a profit from the trade and therefore the premium is getting lower and lower |
| What is RC in Option Trading and how to calculate it? | RC - Risk Capital = Strike Price - Premium |
| What is RORC in Option Trading and how to calculate it? | RORC - Return on Risk Capital = Premium / RC (Risk Capital) |
| What is Multiplier in Option Trading and how to calculate it? | Multiplier = 365 / DTE - Number of time we could theoraticaly repeat the trade in a year |
| What is ARORC in Option Trading and how to calculate it? | ARORC - Annualized Return on Risk Capital = RORC x Multiplier |
| What is the minimum about of money you need to make an Option trade? | Your RC (Risk Capital) x number of contract x 100 |
| What is the Spread? | It is the difference between the Bid and the Ask |
