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Chapter 6 SIE
| Term | Definition |
|---|---|
| Bearish | pessimistic market sentiment characterized by a belief that a security, market sector or the overall market will fall |
| Bullish | optimistic market sentiment characterized by a belief that a security, market sector or the overall market will rise |
| Derivative | a financial contract with a value that is derived from and whose performance is based on an underlying asset, such as a index, asset or interest rateq |
| Discretionary account | a type of brokerage account in which clients pre-authorize their broker to buy and sell securities on their behalf without prior consent for each individual transaction |
| Intrinsic value | the difference between the price of the underlying security and the strike price of the option (or the price which the option may exercised) |
| Options | legally binding contracts between buyers and sellers. They are valid for a specified period of time |
| option holder | this person has the right to buy or sell the underlying security at a specified price, known as the strike or exercise price |
| option writer | the person who is obligated to buy or sell the security at the strike price. They receive the premium. |
| Class | a class of options consists of options of the same type on the same underlying security |
| premium | the price of an option |
| OTC Options | negotiated options that trade in the OTC market. They are not standardized or listed on an exchange. |
| Hedging | a strategy that investors use to limit losses on securities and control risk. |
| Speculation | involves assuming significant risk in an effort to generate large profits. |
| expiration date | the day on which the option contract ceases to exist or becomes worthless. This occurs on the third Friday of the month at 11:59 Eastern Time with equity options |
| call option | a contract that gives the call holder the right to purchase 100 shares of the underlying security, at the strike price, until expiration |
| Call writer | sells the call short. Has the obligation to sell 100 shares of the underlying security at the strike price, until expiration. Receives the premium price. |
| put option | a contract that gives the put holder the right to sell 100 shares of the underlying security at the strike price until expiration. They pay the premium. |
| put writer | sells the put short. He has the obligation to buy 100 shares of the underlying security at the strike price, until expiration. They receive the premium. |
| time value | the portion of an option's premium that is based on the amount of time remaining until the expiration date of the option contract. It is equal to the difference between the premium and intrinsic value. |
| Covered option | call option backed by the ownership of the underlying asset or it would be covered if the investor had cash in the account equal to the exercise price of the option contract.. It reduces risk, but limits potential profit. |
| Uncovered/naked options | writers do not hold the underlying shares. The investor would be exposed potentially to an unlimited loss. |
| opening transaction | establishes a new options position or adds to an existing option |
| closing transaction | closes out or reduces an existing options position. |
| opening purchas | establishes a long position in the options (puts or calls) |
| opening sell | establishes a short position in the options. |
| closing sell | when the long position in sold |
| closing purhcase | when an option writer covers his position by buying back his short option position |
| American Style Options | can be exercised at any time up to the cut-off time on expiration day Usually more expensive, and sellers assume more risk. |
| European style options | can only be exercised during a specific time period, usually at expiration., and are less expensive |
| Options Clearing Corporation (OCC) | the issuer and clearing agent for listed options. It standardizes options contracts by setting strike prices, expiration dates, and contract sizes |
| Physical settlement | Involves the actual delivery of the underlying security. The holder of a call option would buy the underlying security if it were exercise. The holder of a put option would sell the underlying security. They tend to be American style. |
| Cash Settlement | used for options contracts based on securities that are not easily transferred or delivered, including contracts based on indexes, foreign currencies, and commodities. They are typically European style, and are settled automatically at expiration |
| Protective put purchase | allows an investor to protect a profit on an established long stock position by purchasing calls on the short stock. |
| breakeven point | the price at which the stock is purchased plus the premium paid for the put, when a customer buys a stock and also buys a put on the same stock |
| protective call purchase | involves protecting a short stock position by purchasing calls on the short stock. |
| covered write | provides a stock investor with a partial hedge and income. Established by writing options, share-for-share, against a stock position and collects the premium. |
| Options Disclosure Document (ODD) | is like a prospectus. it details the risks involved in trading options. It must be provided to customers at or prior to the time that an options account is approved for trading. |
| Annuity | a contract that provides a stream of income for a specified period of years, or for life. It protects a person against outliving his or her money. It is a vehicle for accumulating money and then later distributing it to the owner. |
| variable annuity | provides lifetime income that will keep up with inflation. the annuitant bears the investment risk. Investment returns are not guaranteed. |
| annuitant | the person who receives benefits or payments from the annuity |
| accumulation period | begins with the date on which the annuity becomes effective and continues until the payout period begins. |
| annuity period | begins at the end of the accumulation period. Accumulation units are exchanged for annuity units, and the annuitant begins to receive payments |
| fixed annuity | guarantees a certain amount of income based on the purchase payments deposited. The insurance company assumes the investments risk of generating the return to support the income payments. |
| immediate annuity | an annuity contract that is purchased with a single premium or lump sum payment. This annuity provides immediate income to the investor |
| deferred annuity | a type of annuity contract that delays payments until the investor elects to receive them. This annuity grows tax deferred until payments begin. |
| separate account | in a variable contract, is a pool of securities, much like a mutual fund, which must be registered under the securities act of 1933 and the investment company act of 1940. Its units must be sold with a prospectus. |
| general account | invested in long term debt instruments, with the primary objective of providing a stable return to fund the guarantees made by the insurance company on its fixed insurance and annuity products. |
| accumulation unit | the deposited money in an annuity is expressed in these units. It is directly related to the performance of the separate account. They are purchased at the separate account's net asset value (NAV) |
| annuity unit | the accounting measure used to determine the payment amounts to an annuitant during the payout |
| straight life or life only annuity | this option gives the annuitant the highest periodic payment, but carries the most risk. The annuitant receives payments as ling as he or she lives. Upon the annuitant's death, all payments end. It is the least expensive payout option. |
| life annuity with period certain (fixed period) | periodic payments are made to the annuitant for a specified number of years (usually 10 or 15). If the annuitant dies before the end of the period, the remaining payments due will be made in a lump sum or in installments to the named beneficiary. |
| Unit refund life annuity | this option provides periodic payments during the annuitant's lifetime. if the annuitant dies prior to receiving an amount equal to the value of the annuity units, the remining portion will be paid in a lump sum or installments to the beneficiary. |
| joint and last survivor life annuity | with this option, payments are made to 2 people. If one annuitant dies, payments continue to be made to the surviving annuitant. All payments cease when the remaining person dies. This option provides the largest promise (least risk) to the annuitant |
| Combination Annuity | a portion of the contract pays fixed interest, while the remaining portion could be placed in a variable annuity. Provides a good hedge against inflation and deflation. |
| Expense limitation | any administrative expenses above the contractually stated maximum charges are the responsibility of the insurance company |
| termination | at this time, if a policyholder stops making premium payments into the policy, the owner is entitles to the surrender value of the policy. |
| surrender value | the cash value of the policy minus any outstanding loans or unpaid interest charges |
| nonforfeiture clause | provides that the policyowner receives the accumulated cash value should premium payments cease and the policy is surrendered. The actual amount available is the value calculated at the time of surrender. |
| Conversion privilege | gives policyowners the right to exchange one form of permanent insurance policy for another type of permanent policy. |
| in the money | option that has intrinsic value |
| long calls | best option hedge for short stock |
| unlimited | maximum potential loss for writing uncovered calls |
| strike price | another name for the exercise price of an option |
| long puts | provides the best hedge for long stock |
| discretionary account | when a customer authorizes an account executive in writing to buy and sell securities on the customer's behalf |
| protective put purchase | purchasing puts on a long stock position to protect the profit |
| Registered Options Principal (ROP) | approves all options accounts prior to trading |
| covered call option | backed by the ownership of the underlying asset |
Created by:
emulligan
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