Options Basics
Key terms and formulas for calls, puts, premiums, and basic option strategies tested on the SIE.
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Questions Covered in This Set
10 cards to master
What does an option contract give the buyer?
The right, but not the obligation, to buy or sell a specific security at a set price for a set period. The writer (seller) takes on the obligation.
How many shares does one standard listed equity option cover?
100 shares of the underlying stock. A premium of 3 means 3 × 100 = $300.
Call buyer vs. put buyer market outlook
Call buyers are bullish (right to buy at the strike); put buyers are bearish (right to sell at the strike). Memory device: call up, put down.
When is a call in the money? A put?
A call is ITM when market price is above the strike; a put is ITM when market price is below the strike. Market = strike is at the money.
Premium = ?
Intrinsic value (the in-the-money amount) + time value. Example: stock $53, 50 call at $4.50 → $3 intrinsic + $1.50 time value.
Breakeven formulas for call and put buyers
Call breakeven = strike + premium; put breakeven = strike − premium. (Call up, put down.)
Exercise vs. assignment, and the OCC's role
Exercise is the buyer using the contract; the OCC (issuer and guarantor of listed options) then randomly assigns the obligation to a writer.
American style vs. European style options
American style (listed equity options) can be exercised any time before expiration; European style (most index options) only at expiration. Options expire the third Friday of the expiration month.
Protective put (hedge) for a long stock position
Own 100 shares and buy a put: the premium is insurance that locks in a minimum sale price at the strike, while upside stays open (reduced by premium). A short seller hedges by buying a call.
Covered call (income strategy)
Own the stock and write a call: premium is income that lowers cost basis (own at $50, collect $2 → basis $48), but gains are capped at the strike. Risk is opportunity cost, not unlimited loss.
