Spread Trading: An Introduction to Trading Options in Nine Simple Steps

APPENDIX

Answers to End-of-Chapter Reviews

CHAPTER 3 ANSWERS

“I have paid a certain dollar amount to enter this trade. By doing so, I now have the right to call out and buy 100 of Shorty’s shares for $40 if I want to. I also have the right to do this anytime in the next six months. I also have the right not to call out his shares if I don’t want to; I can let my option expire. If I do, I forfeit the amount I paid to Shorty.

“Shorty, for his part, has received a certain dollar amount from me to enter this trade. By taking my money, he now has the obligation to sell me his shares for $40 if I call them out. Shorty has to do this if I exercise my option any time in the next six months. If I never exercise my option, Shorty still gets to keep the $500 I have paid him.”

CHAPTER 4 ANSWERS

“Lon has bought from me an option of a certain type. Because he has the right to call out or buy my shares at $40, this kind of option is called a call. The $40 amount we agreed to is called the strike price. Since Lon is buying this option, we say that he is long. Since I am selling this option, we say that I am short. Thus, from my end, this is a short call and from Lon’s end, it is a long call. The $5 Lon is paying me is for him a debit and for me a credit. So we might say I am doing a credit trade and he is doing a debit trade. The whole trade might be called an option contract, and the date it ends is called the expiration date.”

CHAPTER 5 ANSWERS

The chart of strike prices is based on the ...