What is the difference between return on equity and return on capital?

June 30, 2024 No Comments

A: Return on equity (ROE) and return on capital (ROC) measure very similar concepts, but with a slight difference in the underlying formulas. Both measures are used to decipher the profitability of a company based on the money it had to work with. Calculating Return

What is the relationship between implied volatility and the volatility skew?

June 30, 2024 No Comments

A: The volatility skew refers to the shape of implied volatilities for options graphed across the range of strike prices for options with the same expiration date. The resulting shape often shows a skew or smile where the implied volatility values for options further out

What kinds of derivatives are types of contingent claims?

June 30, 2024 No Comments

A: A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain future event. Common types of contingent claim derivatives include options and modified versions of swaps, forward contracts and futures contracts. Any derivative instrument

What types of options positions create unlimited liability?

June 30, 2024 No Comments

A: Selling naked calls creates unlimited liability. Therefore, these types of option strategies are considered appropriate for sophisticated traders with proper risk management and discipline due to the limitless losses. Selling calls is typically done against existing stock holdings in an attempt to create income

When is a put option considered to be “in the money”?

June 30, 2024 No Comments

A: An option contract is a financial derivative that represents a holder who buys a contract sold by a writer. The moneyness of an option describes a situation that relates the strike price of a derivative to the price of the derivative’s underlying security. A

What is the CBOE Volatility Index? (VIX)

June 30, 2024 No Comments

A: The Chicago Board Options Exchange (CBOE) calculates a real-time index to show the expected level of price fluctuation in the S&P 500 Index option over the next 12 months. Officially called the CBOE Volatility Index and listed under the ticker symbol VIX, investors and

What is the difference between “right” and “obligation” on a call option?

June 30, 2024 No Comments

A: An option is a financial instrument whose value is derived from an underlying asset. A call option is an agreement that gives the buyer, or holder, the right to buy the underlying asset, or stock, at a predetermined strike price on or by a

What is the difference between a covered call and a regular call?

June 30, 2024 No Comments

A: A call option is a contract that gives the buyer, or holder, a right to buy an asset at a predetermined price by or on a predetermined date. A call option is used to create multiple strategies, such as a covered call and a

How do I set a strike price for an option?

June 30, 2024 No Comments

A: The strike price of an option is the price at which the contract can be exercised. The strike price of a stock and an index option is fixed in the contract. Depending on the amount of premium you want to spend, you may want

What is the difference between a currency and interest rate swap?

June 30, 2024 No Comments

A: Swaps are derivative contracts between two parties that involve the exchange of cash flows. Interest rate swaps involve exchanging interest payments, while currency swaps involve exchanging an amount of cash in one currency for the same amount in another. An interest rate swap is

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