2.11 Options Basics & Specifications
Options are derivative contracts. At the SIE level, you must know calls vs puts, buyers vs sellers, and in-the-money vs out-of-the-money definitions.
Key FINRA Exam Takeaways
- 1 contract = 100 shares of underlying stock.
- Call Option: Buyer has right to BUY stock at strike price; Seller has obligation to SELL stock at strike.
- Put Option: Buyer has right to SELL stock at strike price; Seller has obligation to BUY stock at strike.
- Call In-the-Money (ITM): Market Price > Strike Price. Put ITM: Market Price < Strike Price.
- Intrinsic Value = Amount ITM (cannot be negative). Premium = Intrinsic Value + Time Value.
Knowledge Checkpoint • Section 2.11
An investor purchases 1 ABC Oct 40 Call for a premium of $3.00 when ABC stock is trading at $44. What is the intrinsic value and time value of this option contract?