OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)


 Bertha Crawford
 2 years ago
 Views:
Transcription
1 OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call option buyer has the right to buy, but not the obligation to buy, a certain quantity of the underlying asset at a predetermined (strike or exercise) price on or before the expiration date. The seller (writer) of a call option agrees to sell a certain quantity of the underlying asset at the strike price to the call option buyer on or before the expiration date if the buyer chooses to exercise the option. A put option buyer has the right to sell, but not the obligation to sell, a certain quantity of the underlying asset at the strike price on or before the expiration date. The seller (writer) of a put option agrees to buy a certain quantity of the underlying asset at the strike price from the put option buyer on or before the expiration date if the buyer chooses to exercise the option. The buyer pays an option premium (call or put price) to the seller. 161
2 BASIC FEATURES OF AN OPTION CONTRACT 1. Identity of the underlying security Individual common stock; stock and bond market indexes; foreign currencies; futures contracts; Treasury bills and bonds 2. Strike or exercise price 3. Expiration or maturity date Shortterm: stock options usually expire in less than 9 months LEAPS (LongTerm Equity Anticipation Shares) are options on certain stocks and stock indexes that have expirations of up to three years The actual expiration day of a stock and index option is the third Friday of the month 4. Contract size One stock option contract represents rights to 100 shares of the underlying stock Options on indexes are specified as a multiple, usually 100; e.g., OEX (S&P 100) 5. Exercise style European options can be exercised only on the exercise date; most index options American options can be exercised at any time on or before the exercise date; most individual stock options 6. Delivery or settlement procedure 162
3 OPTION TRADING Option exchanges: CBOE; New York; American; Philadelphia; Pacific Option Clearing Corporation Stock Orders vs. Options Orders Stock orders < Buy! sell < Sell short! buy to cover Options order < Buy Open (call or put) Then three possible actions: 1. Sell Close (offset order) 2. Exercise the option 3. Let the option expire < Sell Open (Call or Put) Then three possible outcomes: 1. Buy Close (offset order) 2. The buyer exercises the option 3. Nothing (the buyer chooses to let the option expire) 163
4 AttheMoney option: when strike price = current stock price IntheMoney Call option: when strike price < current stock price Put option: when strike price > current stock price OutoftheMoney Call option: when strike price > current stock price Put option: when strike price < current stock price Option Price (Premium): The price the buyer of an option (call or put) pays the seller of the option Intrinsic value for in the money call = S 0  X Intrinsic value for in the money put = X  S 0 Premium (price) = intrinsic value + speculative premium Early Exercise of Options 164
5 BASIC OPTIONS STRATEGIES Buying stocks vs. buying call options Selling (writing) naked (or uncovered) call options Short selling stocks vs. buying put options Selling put options ADVANCED OPTIONS STRATEGIES Covered calls (buy stock and sell call) Protective puts (buy stock and buy put) BUYING STOCKS VS. BUYING CALL OPTIONS Buy Stock Pay $20 per share Profit/loss table $0 $10 $30 $40 Profit/Loss In dollars Profit/Loss In % 100% 50% 50% 100% º Unlimited potential profit but limited potential loss Profit/loss diagram 165
6 Buy Call Strike price, X = $20; current stock price, S 0 = $20 Pay call premium $2 or $200 per contract = stock price at expiration Call value at expiration = (  X) if ( > X) = 0 if ( # X) Profit/loss table Call Value Call Premium Profit/Loss Return (%) $ % $ % $ % $ % $ % º Unlimited potential profit but limited potential loss (the call premium) º Buying a call option provides a much greater leverage than buying the stock itself and also a limited dollar risk Profit/loss diagram 166
7 SELL NAKED OR UNCOVERED CALL Sell call option and receive call premium $2 or $200 per contract The seller does not own the underlying stock Strike price, X = $20; current stock price, S 0 = $20 Call value at expiration = (  X) if ( > X) = 0 if ( # X) Profit/loss table Call Value Call Premium Profit/Loss $ $ $ $ $ º Limited potential profit (the call premium) but unlimited potential loss Profit/loss diagram 167
8 SHORT SELLING STOCKS VS. BUYING PUT OPTIONS Short Sell Stock Short sell at $20 per share Profit/loss table $0 $10 $30 $40 Profit/Loss In dollars Profit/Loss In % 100% 50% 50% 100% º Limited potential profit but unlimited potential loss Profit/loss diagram 168
9 Buy Put Strike price, X = $20; current stock price, S 0 = $20 Pay put premium $1 or $100 per contract The buyer does not own the underlying stock Put value at expiration = 0 if ( $ X) = (X  ) if ( < X) Profit/loss table Put Value Put Premium Profit/Loss $ $ $ $ $ º Limited, but large, potential profit and limited loss (the put premium) Profit/loss diagram 169
10 SELL PUT Strike price, X = $20; current stock price, S 0 = $20 Receive put premium $1 or $100 per contract Put value at expiration = 0 if ( $ X) = (X  ) if ( < X) Profit/loss table Put Value Put Premium Profit/Loss $ $ $ $ $ º Limited potential profit and limited, but large potential loss Profit/loss diagram 1610
11 COVERED CALL The call option seller (or writer) owns the underlying stock Strike price, X = $40; current stock price, S 0 = $38 Receive call premium $4 or $400 per contract Profit/loss table ) Stock Value Call Value Call Premium Profit/Loss $ $ $ $ $ º The call premium acts like a cushion or hedge when stock price drops º Limited potential profit and limited, but large, potential loss º Risk reducing strategy Profit/loss diagram 1611
12 PROTECTIVE PUT The buyer of the put options owns the underlying stock, similar to buying insurance or forming a hedge against a decline in stock price Strike price, X = $20; current stock price, S 0 = $22 Pay put premium $2 or $200 per contract Profit/loss table ) Stock Value Put Value Put Premium Profit/ Loss $ $ $ $ $ º Unlimited potential profit but limited loss º The loss = the put premium or insurance premium when X = S 0 Profit/loss diagram 1612
13 VALUATION OF CALL AND PUT OPTIONS Determinants of Option Values (Chapter 17, P. 542) Call Option Put Option Current Stock Price +  Exercise Price  + Time to Expiration + + Stock Volatility + + Interest Rate
14 The PutCall Parity (equation 17.2) Portfolio A: Buy a call option and sell a put option on the same stock with the same exercise price and expiration date < The cost of investing in Portfolio A = C  P < The payoff Payoff at Expiration Position < X > X Buy call 0  X Sell put (X  ) 0 Total  X  X Portfolio B: Buy the stock (paying S 0 ) and borrowing a loan with a value = the present value of the exercise price or X/(1 + r F ) T < The cost of investing in Portfolio B = S 0  X/(1 + r F ) T < The payoff Payoff at Expiration Position < X > X Buy stock Borrow loan X X Total  X  X Both portfolios have the same payoffs º both must have the same costs C  P = S 0  X/(1 + r F ) T Arbitrage opportunity exists if the parity is violated 1614
15 Arbitrage Example Example 17.2 Stock S 0 = $110 Call option (X = $105, 6month expiration) C = $17 Put option (X = $105, 6month expiration) P = $5 Risk free interest rate r F = 10.25% Portfolio A: C  P = $12 Portfolio B: S 0  X/(1 + r F ) T = /(1.1025) 0.5 = = $10 Portfolio A is overvalued and/or Portfolio B is undervalued Arbitrage strategy: Sell Portfolio A and buy Portfolio B Payoff table Payoff at expiration Position Immediate Cash Flow = $0 = $200 Sell call (X = $105) $17 $0 $95 Buy put (X = $105) $5 $105 $0 Buy stock $110 $0 $200 Borrow loan $100 $105 $105 Total $2 $0 $0 HOMEWORK: CHAPTER 16: 1, 2, 3, 4, 5(no diagram), 20(A&B) and CK 1 CHAPTER 17: 2(AD) 1615
16 SOLUTIONS: CHAPTER Answer c is false (why) 2. Answer c (why) 3. $ Option Premium Option Value Profit/Loss A Call X = B Put X = C Call X = D Put X = E Call X = F Put X = Investment Value: Stock price $80 $100 $110 $120 All stocks (100 shares) 8,000 10,000 11,000 12,000 All options (10 contracts) ,000 20,000 Bills + options 9,360 9,360 10,360 11,360 Rate of returns: All stocks (100 shares) 20% 0% 10% 20% All options (10 contracts) 100% 100% 0% 100% Bills + options 6.4% 6.4% 3.6% 13.6% 1616
17 20. (A) (B) Sally does better when the stock price is high, but worse when the stock price is low. SOLUTIONS: CHAPTER (A) Put A (B) Put B (C) Call B (D) Call B 1617
Answers to Concepts in Review
Answers to Concepts in Review 1. Puts and calls are negotiable options issued in bearer form that allow the holder to sell (put) or buy (call) a stipulated amount of a specific security/financial asset,
More informationCHAPTER 20. Financial Options. Chapter Synopsis
CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified
More informationUnderlying (S) The asset, which the option buyer has the right to buy or sell. Notation: S or S t = S(t)
INTRODUCTION TO OPTIONS Readings: Hull, Chapters 8, 9, and 10 Part I. Options Basics Options Lexicon Options Payoffs (Payoff diagrams) Calls and Puts as two halves of a forward contract: the PutCallForward
More informationIntroduction to Options
Introduction to Options By: Peter Findley and Sreesha Vaman Investment Analysis Group What Is An Option? One contract is the right to buy or sell 100 shares The price of the option depends on the price
More informationFinance 436 Futures and Options Review Notes for Final Exam. Chapter 9
Finance 436 Futures and Options Review Notes for Final Exam Chapter 9 1. Options: call options vs. put options, American options vs. European options 2. Characteristics: option premium, option type, underlying
More informationDerivatives: Options
Derivatives: Options Call Option: The right, but not the obligation, to buy an asset at a specified exercise (or, strike) price on or before a specified date. Put Option: The right, but not the obligation,
More informationChapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO ENDOFCHAPTER QUESTIONS
Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO ENDOFCHAPTER QUESTIONS 81 a. An option is a contract which gives its holder the right to buy or sell an asset at some predetermined
More informationFX, Derivatives and DCM workshop I. Introduction to Options
Introduction to Options What is a Currency Option Contract? A financial agreement giving the buyer the right (but not the obligation) to buy/sell a specified amount of currency at a specified rate on a
More informationChapter 20 Understanding Options
Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interestrate options (III) Commodity options D) I, II, and III
More informationDERIVATIVES Presented by Sade Odunaiya Partner, Risk Management Alliance Consulting DERIVATIVES Introduction Forward Rate Agreements FRA Swaps Futures Options Summary INTRODUCTION Financial Market Participants
More informationAn Option In the security market, an option gives the holder the right to buy or sell a stock (or index of stocks) at a specified price ( strike
Reading: Chapter 17 An Option In the security market, an option gives the holder the right to buy or sell a stock (or index of stocks) at a specified price ( strike price) within a specified time period.
More informationChapter 15 OPTIONS ON MONEY MARKET FUTURES
Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS
More informationINTRODUCTION TO OPTIONS MARKETS QUESTIONS
INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option
More informationUnderstanding Stock Options
Understanding Stock Options Introduction...2 Benefits Of ExchangeTraded Options... 4 Options Compared To Common Stocks... 6 What Is An Option... 7 Basic Strategies... 12 Conclusion...20 Glossary...22
More informationOptions Markets: Introduction
Options Markets: Introduction Chapter 20 Option Contracts call option = contract that gives the holder the right to purchase an asset at a specified price, on or before a certain date put option = contract
More informationLEAPS LONGTERM EQUITY ANTICIPATION SECURITIES
LEAPS LONGTERM EQUITY ANTICIPATION SECURITIES The Options Industry Council (OIC) is a nonprofit association created to educate the investing public and brokers about the benefits and risks of exchangetraded
More informationOptions CHAPTER 7 INTRODUCTION OPTION CLASSIFICATION
CHAPTER 7 Options INTRODUCTION An option is a contract between two parties that determines the time and price at which a stock may be bought or sold. The two parties to the contract are the buyer and the
More informationOctober 2003 UNDERSTANDING STOCK OPTIONS
October 2003 UNDERSTANDING STOCK OPTIONS Table of Contents Introduction 3 Benefits of ExchangeTraded Options 5 Orderly, Efficient, and Liquid Markets Flexibility Leverage Limited Risk for Buyer Guaranteed
More informationChapter 21: Options and Corporate Finance
Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the
More informationForwards and Futures
Prof. Alex Shapiro Lecture Notes 16 Forwards and Futures I. Readings and Suggested Practice Problems II. Forward Contracts III. Futures Contracts IV. ForwardSpot Parity V. Stock Index ForwardSpot Parity
More informationCall and Put. Options. American and European Options. Option Terminology. Payoffs of European Options. Different Types of Options
Call and Put Options A call option gives its holder the right to purchase an asset for a specified price, called the strike price, on or before some specified expiration date. A put option gives its holder
More informationBuying Equity Call Options
Buying Equity Call Options Presented by The Options Industry Council 1888OPTIONS Equity Call Options Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor
More informationOption Premium = Intrinsic. Speculative Value. Value
Chapters 4/ Part Options: Basic Concepts Options Call Options Put Options Selling Options Reading The Wall Street Journal Combinations of Options Valuing Options An OptionPricing Formula Investment in
More informationOverview. Option Basics. Options and Derivatives. Professor Lasse H. Pedersen. Option basics and option strategies
Options and Derivatives Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Overview Option basics and option strategies Noarbitrage bounds on option prices Binomial option pricing BlackScholesMerton
More informationFor example, someone paid $3.67 per share (or $367 plus fees total) for the right to buy 100 shares of IBM for $180 on or before November 18, 2011
Chapter 7  Put and Call Options written for Economics 104 Financial Economics by Prof Gary R. Evans First edition 1995, this edition September 24, 2011 Gary R. Evans This is an effort to explain puts
More information11 Option. Payoffs and Option Strategies. Answers to Questions and Problems
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various
More informationInterest Rate Options
Interest Rate Options A discussion of how investors can help control interest rate exposure and make the most of the interest rate market. The Chicago Board Options Exchange (CBOE) is the world s largest
More informationOption Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration
CHAPTER 16 Option Valuation 16.1 OPTION VALUATION: INTRODUCTION Option Values Intrinsic value  profit that could be made if the option was immediately exercised Call: stock price  exercise price Put:
More informationFIN40008 FINANCIAL INSTRUMENTS SPRING 2008
FIN40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes consider the way put and call options and the underlying can be combined to create hedges, spreads and combinations. We will consider the
More informationIntroduction to Options. Derivatives
Introduction to Options Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 18, 2010 Derivatives A derivative is a security whose payoff or value depends on (is derived
More informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk
More informationOPTION TRADING STRATEGIES IN INDIAN STOCK MARKET
OPTION TRADING STRATEGIES IN INDIAN STOCK MARKET Dr. Rashmi Rathi Assistant Professor Onkarmal Somani College of Commerce, Jodhpur ABSTRACT Options are important derivative securities trading all over
More informationOption Theory Basics
Option Basics What is an Option? Option Theory Basics An option is a traded security that is a derivative product. By derivative product we mean that it is a product whose value is based upon, or derived
More informationLecture 4: Derivatives
Lecture 4: Derivatives School of Mathematics Introduction to Financial Mathematics, 2015 Lecture 4 1 Financial Derivatives 2 uropean Call and Put Options 3 Payoff Diagrams, Short Selling and Profit Derivatives
More informationwww.optionseducation.org OIC Options on ETFs
www.optionseducation.org Options on ETFs 1 The Options Industry Council For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations,
More informationContents. 2 What are Options? 3 Ways to use Options. 7 Getting started. 8 Frequently asked questions. 13 Contact us. 14 Important Information
Options For individuals, companies, trusts and SMSFs The Options and Lending Facility Contents 2 What are Options? 3 Ways to use Options 7 Getting started 8 Frequently asked questions 13 Contact us 14
More informationOnline Appendix: Payoff Diagrams for Futures and Options
Online Appendix: Diagrams for Futures and Options As we have seen, derivatives provide a set of future payoffs based on the price of the underlying asset. We discussed how derivatives can be mixed and
More informationHedging with Futures and Options: Supplementary Material. Global Financial Management
Hedging with Futures and Options: Supplementary Material Global Financial Management Fuqua School of Business Duke University 1 Hedging Stock Market Risk: S&P500 Futures Contract A futures contract on
More informationCHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS
1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries
More informationJanuary 2001 UNDERSTANDING INDEX OPTIONS
January 2001 UNDERSTANDING INDEX OPTIONS Table of Contents Introduction 3 Benefits of Listed Index Options 5 What is an Index Option? 7 Equity vs. Index Options 9 Pricing Factors Underlying Instrument
More informationFundamentals of Futures and Options (a summary)
Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.
More informationGoals. Options. Derivatives: Definition. Goals. Definitions Options. Spring 2007 Lecture Notes 4.6.1 Readings:Mayo 28.
Goals Options Spring 27 Lecture Notes 4.6.1 Readings:Mayo 28 Definitions Options Call option Put option Option strategies Derivatives: Definition Derivative: Any security whose payoff depends on any other
More informationFIN40008 FINANCIAL INSTRUMENTS SPRING 2008. Options
FIN40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes describe the payoffs to European and American put and call options the socalled plain vanilla options. We consider the payoffs to these
More informationOptions on. Dow Jones Industrial Average SM. the. DJX and DIA. Act on the Market You Know Best.
Options on the Dow Jones Industrial Average SM DJX and DIA Act on the Market You Know Best. A glossary of options definitions appears on page 21. The Chicago Board Options Exchange (CBOE) was founded in
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the PutCall Parity Relationship. I. Preliminary Material Recall the payoff
More information6. Foreign Currency Options
6. Foreign Currency Options So far, we have studied contracts whose payoffs are contingent on the spot rate (foreign currency forward and foreign currency futures). he payoffs from these instruments are
More information} } Global Markets. Currency options. Currency options. Introduction. Options contracts. Types of options contracts
Global Markets Currency options Currency options Introduction Currency options have gained acceptance as invaluable tools in managing foreign exchange risk. They are extensively used and bring a much wider
More informationOptions, Futures, and Other Derivatives 7 th Edition, Copyright John C. Hull 2008 2
Mechanics of Options Markets Chapter 8 Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hull 2008 1 Review of Option Types A call is an option to buy A put is an option to sell A
More informationChapter 11 Options. Main Issues. Introduction to Options. Use of Options. Properties of Option Prices. Valuation Models of Options.
Chapter 11 Options Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Part C Determination of riskadjusted discount rate. Part D Introduction to derivatives. Forwards
More informationOptions. Options Explained. Lorem ipsum dolor
Lorem ipsum dolor Sit amet, consetetur sadipscing elitr, sed diam nonumy eirmod tempor invidunt ut labore et dolore magna gubergren, no sea takimata sanctus est Lorem ipsum dolor sit amet. Options Options
More informationCHAPTER 22 Options and Corporate Finance
CHAPTER 22 Options and Corporate Finance Multiple Choice Questions: I. DEFINITIONS OPTIONS a 1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset
More informationIntroduction. Part IV: Option Fundamentals. Derivatives & Risk Management. The Nature of Derivatives. Definitions. Options. Main themes Options
Derivatives & Risk Management Main themes Options option pricing (microstructure & investments) hedging & real options (corporate) This & next weeks lectures Introduction Part IV: Option Fundamentals»
More informationUNDERSTANDING INDEX OPTIONS
UNDERSTANDING INDEX OPTIONS The Options Industry Council (OIC) is an industry cooperative created to educate the investing public and brokers about the benefits and risks of exchangetraded options. Options
More informationStock Options. Definition
Stock Options Definition Contractual instruments whereby two parties enter into an agreement To give something of value to each other Option contract gives the holder the right to buy/ sell a certain amount
More informationEXP 481  Capital Markets Option Pricing. Options: Definitions. Arbitrage Restrictions on Call Prices. Arbitrage Restrictions on Call Prices 1) C > 0
EXP 481  Capital Markets Option Pricing imple arbitrage relations Payoffs to call options Blackcholes model PutCall Parity Implied Volatility Options: Definitions A call option gives the buyer the
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support
More informationUnderstanding Options Trading. ASX. The Australian Sharemarket
Understanding Options Trading ASX. The Australian Sharemarket Disclaimer of Liability Information provided is for educational purposes and does not constitute financial product advice. You should obtain
More informationunderstanding options
Investment Planning understanding options Get acquainted with this versatile investment tool. Understanding Options This brochure discusses the basic concepts of options: what they are, common investment
More informationVolatility as an indicator of Supply and Demand for the Option. the price of a stock expressed as a decimal or percentage.
Option Greeks  Evaluating Option Price Sensitivity to: Price Changes to the Stock Time to Expiration Alterations in Interest Rates Volatility as an indicator of Supply and Demand for the Option Different
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,
More informationFigure S9.1 Profit from long position in Problem 9.9
Problem 9.9 Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances
More informationTHE EQUITY OPTIONS STRATEGY GUIDE
THE EQUITY OPTIONS STRATEGY GUIDE APRIL 2003 Table of Contents Introduction 2 Option Terms and Concepts 4 What is an Option? 4 Long 4 Short 4 Open 4 Close 5 Leverage and Risk 5 Inthemoney, Atthemoney,
More informationBuying Call or Long Call. Unlimited Profit Potential
Options Basis 1 An Investor can use options to achieve a number of different things depending on the strategy the investor employs. Novice option traders will be allowed to buy calls and puts, to anticipate
More informationOptions/1. Prof. Ian Giddy
Options/1 New York University Stern School of Business Options Prof. Ian Giddy New York University Options Puts and Calls PutCall Parity Combinations and Trading Strategies Valuation Hedging Options2
More informationUNDERSTANDING EQUITY OPTIONS
UNDERSTANDING EQUITY OPTIONS The Options Industry Council (OIC) is a nonprofit association created to educate the investing public and brokers about the benefits and risks of exchangetraded options.
More informationFIN 411  Investments Option Pricing. Options: Definitions. Arbitrage Restrictions on Call Prices. Arbitrage Restrictions on Call Prices
FIN 411  Investments Option Pricing imple arbitrage relations s to call options Blackcholes model PutCall Parity Implied Volatility Options: Definitions A call option gives the buyer the right, but
More informationMath 489/889. Stochastic Processes and. Advanced Mathematical Finance. Homework 1
Math 489/889 Stochastic Processes and Advanced Mathematical Finance Homework 1 Steve Dunbar Due Friday, September 3, 2010 Problem 1 part a Find and write the definition of a ``future'', also called a futures
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Financial Economics
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Financial Economics June 2014 changes Questions 130 are from the prior version of this document. They have been edited to conform
More informationWHS FX options guide. Getting started with FX options. Predict the trend in currency markets or hedge your positions with FX options.
Getting started with FX options WHS FX options guide Predict the trend in currency markets or hedge your positions with FX options. Refine your trading style and your market outlook. Learn how FX options
More informationWho Should Consider Using Covered Calls?
Who Should Consider Using Covered Calls? An investor who is neutral to moderately bullish on some of the equities in his portfolio. An investor who is willing to limit upside potential in exchange for
More informationThere are two types of options  calls and puts.
Options on Single Stock Futures Overview Options on single Stock Futures An SSF option is, very simply, an instrument that conveys to its holder the right, but not the obligation, to buy or sell an SSF
More informationCHAPTER 14. Stock Options
CHAPTER 14 Stock Options Options have fascinated investors for centuries. The option concept is simple. Instead of buying stock shares today, you buy an option to buy the stock at a later date at a price
More informationSession IX: Lecturer: Dr. Jose Olmo. Module: Economics of Financial Markets. MSc. Financial Economics
Session IX: Stock Options: Properties, Mechanics and Valuation Lecturer: Dr. Jose Olmo Module: Economics of Financial Markets MSc. Financial Economics Department of Economics, City University, London Stock
More informationOPTIONS CALCULATOR QUICK GUIDE. Reshaping Canada s Equities Trading Landscape
OPTIONS CALCULATOR QUICK GUIDE Reshaping Canada s Equities Trading Landscape OCTOBER 2014 Table of Contents Introduction 3 Valuing options 4 Examples 6 Valuing an American style nondividend paying stock
More informationName Graph Description Payoff Profit Comments. commodity at some point in the future at a prespecified. commodity at some point
Name Graph Description Payoff Profit Comments Long Commitment to purchase commodity at some point in the future at a prespecified price S T  F S T F No premium Asset price contingency: Always Maximum
More informationChapter 15  Options Markets
Chapter 15  Options Markets Option contract Option trading Values of options at expiration Options vs. stock investments Option strategies Optionlike securities Option contract Options are rights to
More informationOption Valuation. Chapter 21
Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of inthemoney options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price
More informationChicago Board Options Exchange. Margin Manual
Chicago Board Options Exchange Margin Manual April 2000 TABLE OF CONTENTS INTRODUCTION... 3 INITIAL AND MAINTENANCE MARGIN REQUIREMENTS Long Put or Long Call (9 months or less until expiration)... 4 Long
More informationBasic Option Trading Strategies
Basic Option Trading Strategies What is an option? Definition Option an intangible right bought or sold by a trader to control 100 shares of a security; it expires on a specific date in the future. The
More information2. Exercising the option  buying or selling asset by using option. 3. Strike (or exercise) price  price at which asset may be bought or sold
Chapter 21 : Options1 CHAPTER 21. OPTIONS Contents I. INTRODUCTION BASIC TERMS II. VALUATION OF OPTIONS A. Minimum Values of Options B. Maximum Values of Options C. Determinants of Call Value D. BlackScholes
More informationUnderstanding Options Trading. ASX. The Australian Sharemarket
Understanding Options Trading ASX. The Australian Sharemarket Disclaimer of Liability Information provided is for educational purposes and does not constitute financial product advice. You should obtain
More informationThe Beginners Practical Guide to Options Investing
The Beginners Practical Guide to Options Investing By Chuck Hughes Copyright 2010 by Legacy Publishing LLC. All Rights Reserved. Reproduction or translation of any part of this work beyond that permitted
More informationEC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals
EC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals R. E. Bailey Department of Economics University of Essex Outline Contents 1 Call options and put options 1 2 Payoffs on options
More informationChapter 1: Financial Markets and Financial Derivatives
Chapter 1: Financial Markets and Financial Derivatives 1.1 Financial Markets Financial markets are markets for financial instruments, in which buyers and sellers find each other and create or exchange
More informationOptions (1) Class 19 Financial Management, 15.414
Options (1) Class 19 Financial Management, 15.414 Today Options Risk management: Why, how, and what? Option payoffs Reading Brealey and Myers, Chapter 2, 21 Sally Jameson 2 Types of questions Your company,
More informationFutures Price d,f $ 0.65 = (1.05) (1.04)
24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding
More informationEXCHANGE TRADED OPTIONS
EXCHANGE TRADED OPTIONS A SELF STUDY GUIDE TO TRADING EQUITY OPTIONS NZX EDUCATION This document is provided for general information purposes and is not intended as, and shall not constitute, investment
More informationChapter 5 Option Strategies
Chapter 5 Option Strategies Chapter 4 was concerned with the basic terminology and properties of options. This chapter discusses categorizing and analyzing investment positions constructed by meshing puts
More informationFIN 3710. Final (Practice) Exam 05/23/06
FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name
More informationOption Trading for Rookies, Session I: Option Trading Terminology
Trading for Rookies, Session I: Trading Terminology Disclaimers s involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics
More informationDerivatives  Options Theory September 2008
 Options Theory September 2008 Milestone International Tax Consultants Ltd 45 Clarges Street London W1J 7EP Tel: +44 (0)20 7016 5480 Fax: +44 (0)20 7016 5481 Web: www.milestonetax.com Definitions Option
More informationIndividual Retirement Accounts and Keogh Plans:
Individual Retirement Accounts and Keogh Plans: Portfolio Management Strategies Using Listed Options Exploring investment options that make the most of your IRA and Keogh Plans CBOE INVESTOR SERIES NO.
More informationReference Manual Currency Options
Reference Manual Currency Options TMX Group Equities Toronto Stock Exchange TSX Venture Exchange TMX Select Equicom Derivatives Montréal Exchange CDCC Montréal Climate Exchange Fixed Income Shorcan Energy
More informationCME Options on Futures
CME Education Series CME Options on Futures The Basics Table of Contents SECTION PAGE 1 VOCABULARY 2 2 PRICING FUNDAMENTALS 4 3 ARITHMETIC 6 4 IMPORTANT CONCEPTS 8 5 BASIC STRATEGIES 9 6 REVIEW QUESTIONS
More informationInvestment Finance 421002 Prototype Midterm I
Investment Finance 421002 Prototype Midterm I The correct answer is highlighted by a *. Also, a concise reasoning is provided in Italics. 1. are an indirect way U. S. investor can invest in foreign companies.
More informationChapter 21 Valuing Options
Chapter 21 Valuing Options Multiple Choice Questions 1. Relative to the underlying stock, a call option always has: A) A higher beta and a higher standard deviation of return B) A lower beta and a higher
More informationChapter 2 An Introduction to Forwards and Options
Chapter 2 An Introduction to Forwards and Options Question 2.1. The payoff diagram of the stock is just a graph of the stock price as a function of the stock price: In order to obtain the profit diagram
More informationMechanics of Options Markets
Mechanics of Options Markets Liuren Wu Zicklin School of Business, Baruch College Options Markets (Hull chapter: 8) Liuren Wu (Baruch) Options Markets Mechanics Options Markets 1 / 22 Outline 1 Definition
More informationCommodity Options as Price Insurance for Cattlemen
Managing for Today s Cattle Market and Beyond Commodity Options as Price Insurance for Cattlemen By John C. McKissick, The University of Georgia Most cattlemen are familiar with insurance, insuring their
More informationName: 1 (5) a b c d e TRUE/FALSE 1 (2) TRUE FALSE. 2 (5) a b c d e. 3 (5) a b c d e 2 (2) TRUE FALSE. 4 (5) a b c d e.
Name: Thursday, February 28 th M375T=M396C Introduction to Actuarial Financial Mathematics Spring 2013, The University of Texas at Austin InTerm Exam I Instructor: Milica Čudina Notes: This is a closed
More information