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level: The Basics - Option Trading & Value Investing

Questions and Answers List

level questions: The Basics - Option Trading & Value Investing

QuestionAnswer
What is the 4 advantage of OptionsFlexibility 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 OptionsLimited by Time High risk of losses Complicated
What are the 3 Reasons for Rule #1 people to use Option tradingTo 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 OrderGuaranteed 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