# Put-Call Parity and Synthetics

Size: px
Start display at page:

Transcription

1 Courtesy of Market Taker Mentoring LLC TM Excerpt from Trading Option Greeks, by Dan Passarelli Chapter 6 Put-Call Parity and Synthetics In order to understand more-complex spread strategies involving two or more options, it is essential to understand the arbitrage relationship of the put-call pair. Puts and calls of the same month and strike on the same underlying have prices that are defined in a mathematical relationship. They also have distinctly related vegas, gammas, thetas and deltas. This chapter will show how the metrics of these options are interrelated. It will also explore synthetics and the idea that by adding stock to a position, a trader may trade with indifference either a call or a put to the same effect. Before the creation of the Black-Scholes model, option pricing was hardly an exact science. Traders had only a few mathematical tools available to compare the relative prices of options. One such tool, put-call parity, stems from the fact that puts and calls on the same class sharing the same month and strike can have the same functionality when stock is introduced. For example, traders wanting to own a stock with limited risk can buy a married put: long stock and a long put on a share-for-share basis. The traders have infinite profit potential, and the risk of the position is limited below the strike price of the option. Conceptually, long calls have the same risk/reward profile unlimited profit potential and limited risk below the strike. FIGURE 6.1 is an overview of the at-expiration diagrams of a married put and a long call. Figure 6.1 Long Call vs. Long Stock + Long Put (Married Put)

4 4 Interest = Strike x Interest Rate x (Days to Expiration/365) 1 The two versions of the put-call parity stated here hold true for European options on non dividend-paying stocks. Dividends Another difference between call and married-put values is dividends. A call option does not extend to its owner the right to receive a dividend payment. Traders, however, who are long a put and long stock are entitled to a dividend if it is the corporation s policy to distribute dividends to its shareholders. An adjustment must be made to the put-call parity to account for the possibility of a dividend payment. The equation must be adjusted to account for the absence of dividends paid to call holders. For a dividend-paying stock, the put-call parity states Call + Strike Interest + Dividend = Put + Stock The interest advantage and dividend disadvantage of owning a call is removed from the market by arbitrageurs. Ultimately, that is what is expressed in the put-call parity. It s a way to measure the point at which the arbitrage opportunity ceases to exist. When interest and dividends are factored in, a long call is an equal position to a long put paired with long stock. In options nomenclature, a long put with long stock is a synthetic long call. Algebraically rearranging the above equation: Call = Put + Stock Strike + Interest Dividend The interest and dividend variables in this equation are often referred to as the basis. From this equation, other synthetic relationships can be algebraically derived, like the synthetic long put. 1 Note, for simplicity, simple interest is used in the computation.

5 5 Put = Call Stock + Strike Interest + Dividend A synthetic long put is created by buying a call and selling (short) stock. The atexpiration diagrams in FIGURE 6.2 show identical payouts for these two trades. Figure 6.2 Long Put vs. Long Call + Short Stock Long Put Long Call + Short Stock (Synthetic Long Put) The concept of synthetics can become more approachable when studied from the perspective of delta as well. Take the 5-strike put and call listed on a \$5 stock. A general rule of thumb in the put-call pair is that the call delta plus the put delta equals 1. when the signs are ignored. If the 5 put in this example has a.45 delta, the 5 call will have a.55 delta. By combining the long call (.55 delta) with short stock ( 1. delta), we get a synthetic long put with a.45 delta, just like the actual put. The directional risk is the same for the synthetic put and the actual put. A synthetic short put can be created by selling a call of the same month and strike and buying stock on a share-for-share basis. This is indicated mathematically by multiplying both sides of the put-call parity equation by 1:

6 6 Put = Call + Stock Strike + Interest Dividend same. The at-expiration diagrams, shown in FIGURE 6.3, are again conceptually the Figure 6.3 Short Put vs. Short Call + Long Stock Short Put Short Call + Long Stock (Synthetic Short Put) A short (negative) put is equal to a short (negative) call plus long stock, after the basis adjustment. Consider that if the put is sold instead of buying stock and selling a call, the interest that would otherwise be paid on the cost of the stock up to the strike-price is a savings to the put seller. To balance the equation, the interest benefit of the short put must be added to the call side (or subtracted from the put side). It is the same with dividends. The dividend benefit of owning the stock must be subtracted from the call side to make it equal to the short put side (or added to the put side to make it equal the call side). The same delta concept applies here. The short 5-strike put in our example would have a.45 delta. The short call would have a.55 delta. Buying one hundred shares along with selling the call gives the synthetic short put a net delta of.45 (.55 plus 1.).

7 7 Figure 6.4 Short Call vs. Short Put + Short Stock Short Call Short Put + Short Stock (Synthetic Short Call) Similarly, a synthetic short call can be created by selling a put and selling (short) one hundred shares of stock. FIGURE 6.4 shows a conceptual overview of these two positions at expiration. Put-call parity can be manipulated as shown here to illustrate the composition of the synthetic short call. Call = Put Stock + Strike Interest + Dividend Most professional traders earn a short stock rebate on the proceeds they receive when they short stock an advantage to the short-put short-stock side of the equation. Additionally, short-stock sellers must pay dividends on the shares they are short a liability to the married-put seller. To make all things equal, one subtracts interest and adds dividends to the put side of the equation. Comparing Synthetic Calls and Puts

8 8 The common thread among the synthetic positions explained above is that, for a put-call pair, long options have synthetic equivalents involving long options, and short options have synthetic equivalents involving short options. After accounting for the basis, the four basic synthetic option positions are: Long Call = Long Put + Long Stock Short Call = Short Put + Short Stock Long Put = Long Call + Short Stock Short Put = Short Call + Long Stock Because a call or put position is interchangeable with its synthetic position, an efficient market will ensure that the implied volatility is closely related for both. For example, if a long call has an IV of 25 percent, the corresponding put should have an IV of about 25 percent, because the long put can easily be converted to a synthetic long call and vice versa. The greeks will be similar for synthetically identical positions, too. The long options and their synthetic equivalents will have positive gamma and vega with negative theta. The short options and their synthetics will have negative gamma and vega with positive theta. American Exercise Options Put-call parity was designed for European-style options. The early exercise possibility of American-style options gums up the works a bit. Because a call (put) and a synthetic call (put) are functionally the same, it is logical to assume that the implied volatility and the greeks for both will be the same, too. This is not necessarily true with American-style options. However, put-call parity may still be useful with American options when the limitations of the equation are understood. With at-the-money American-exercise options, the differences in the greeks for a put-call pair are subtle. FIGURE 6.5 is a comparison of the greeks for the 5-strike call and the 5-strike put with the underlying at \$5 and sixty-six days until expiration.

9 9 Figure 6.5 Greeks for a 5-Strike Put-Call Pair on a \$5 Stock Call Put Delta Gamma Theta.2.13 Vega The examples used earlier in this chapter in describing the deltas of synthetics were predicated on the rule of thumb that the absolute values of call and put deltas add up to 1.. To be a bit more realistic, consider that because of American exercise, the absolute delta values of put-call pairs don t always add up to 1.. In fact, Figure 6.5 shows that the call has closer to a.554 delta. The put struck at the same price then has a.457 delta. By selling one hundred shares against the long call, we can create a combinedposition delta (call delta plus stock delta) that is very close to the put s delta. The delta of this synthetic put is.446 (.554 minus 1.). The delta of a put will always be similar to the delta of its corresponding synthetic put. This is also true with call synthetic-call deltas. This relationship mathematically is put synthetic put call synthetic call This holds true whether the options are in-, at-, or out-of-the-money. For example, with a stock at \$54, the 5-put would have a.25 delta and the call would have a.799

### Finance 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

### Volatility 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

Buying Equity Call Options Presented by The Options Industry Council 1-888-OPTIONS Equity Call Options Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor

### www.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,

### Figure 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

### The Vega Trap: How Option Volatility Can Make or Break Your Directional Option Trades. Dan Passarelli. Market Taker Mentoring LLC. MarketTaker.

The Vega Trap: How Option Volatility Can Make or Break Your Directional Option Trades Dan Passarelli Market Taker Mentoring LLC MarketTaker.com Disclaimer In order to simplify the computations, commissions

### Option 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

### Don t be Intimidated by the Greeks, Part 2 August 29, 2013 Joe Burgoyne, OIC

Don t be Intimidated by the Greeks, Part 2 August 29, 2013 Joe Burgoyne, OIC www.optionseducation.org 2 The Options Industry Council Options involve risks and are not suitable for everyone. Prior to buying

### LEAPS LONG-TERM EQUITY ANTICIPATION SECURITIES

LEAPS LONG-TERM EQUITY ANTICIPATION SECURITIES The Options Industry Council (OIC) is a non-profit association created to educate the investing public and brokers about the benefits and risks of exchange-traded

### 9 Basics of options, including trading strategies

ECG590I Asset Pricing. Lecture 9: Basics of options, including trading strategies 1 9 Basics of options, including trading strategies Option: The option of buying (call) or selling (put) an asset. European

Advanced Time Spread Trading: Using Volatility Skew for Edge Dan Passarelli Market Taker Mentoring, Inc. MarketTaker.com Twitter.com/Dan_Passarelli 759741.1.0 Disclaimer In order to simplify the computations,

### Chapter 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

### Chapter 20 Understanding Options

Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interest-rate options (III) Commodity options D) I, II, and III

### Introduction 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

### w w w.c a t l e y l a k e m a n.c o m 0 2 0 7 0 4 3 0 1 0 0

A ADR-Style: for a derivative on an underlying denominated in one currency, where the derivative is denominated in a different currency, payments are exchanged using a floating foreign-exchange rate. The

### Options: Valuation and (No) Arbitrage

Prof. Alex Shapiro Lecture Notes 15 Options: Valuation and (No) Arbitrage I. Readings and Suggested Practice Problems II. Introduction: Objectives and Notation III. No Arbitrage Pricing Bound IV. The Binomial

### Return to Risk Limited website: www.risklimited.com. Overview of Options An Introduction

Return to Risk Limited website: www.risklimited.com Overview of Options An Introduction Options Definition The right, but not the obligation, to enter into a transaction [buy or sell] at a pre-agreed price,

### ETF Options. Presented by The Options Industry Council 1-888-OPTIONS

ETF Options Presented by The Options Industry Council 1-888-OPTIONS ETF Options Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor must receive a copy

### 11 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

### Section 1 - Dow Jones Index Options: Essential terms and definitions

1 of 17 Section 1 - Dow Jones Index Options: Essential terms and definitions Download this in PDF format. In many ways index options are similar to options on individual stocks, so it is relatively easy

### Chapter 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

### January 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

### Trading Debit Spreads. Peter Lusk. Instructor The Options Institute at CBOE

Trading Debit Spreads Peter Lusk Instructor The Options Institute at CBOE Disclosures In order to simplify the computations, commissions have not been included in the examples used in these materials.

Swing Trade Warrior Chapter 1. Introduction to swing trading and how to understand and use options How does Swing Trading Work? The idea behind swing trading is to capitalize on short term moves of stocks

### CHAPTER 21: OPTION VALUATION

CHAPTER 21: OPTION VALUATION 1. Put values also must increase as the volatility of the underlying stock increases. We see this from the parity relation as follows: P = C + PV(X) S 0 + PV(Dividends). Given

### Options/1. Prof. Ian Giddy

Options/1 New York University Stern School of Business Options Prof. Ian Giddy New York University Options Puts and Calls Put-Call Parity Combinations and Trading Strategies Valuation Hedging Options2

### UNDERSTANDING 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 exchange-traded options. Options

### Underlier Filters Category Data Field Description

Price//Capitalization Market Capitalization The market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share. Market Capitalization is not applicable

### CHAPTER 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

### CHAPTER 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

### Fundamentals 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.

### American Options. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan American Options

American Options An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Early Exercise Since American style options give the holder the same rights as European style options plus

### SOCIETY 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 1-30 are from the prior version of this document. They have been edited to conform

### Options 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 Put-Call Parity Relationship. I. Preliminary Material Recall the payoff

### Implied Volatility and Profit vs. Loss. Presented by The Options Industry Council

Implied Volatility and Profit vs. Loss Presented by The Options Industry Council Implied Volatility and Profit vs. Loss Options involve risks and are not suitable for everyone. Prior to buying or selling

### Steve Meizinger. Understanding the FX Option Greeks

Steve Meizinger Understanding the FX Option Greeks For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin

### OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)

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

### INTRODUCTION 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

### central Options An Opportunistic Options Combo for QQQ, the Nasdaq 100 Index ETF www.888 options.com By Steve Ciccarello

www.888 options.com YOUR RESOURCE FOR OPTIONS EDUCATION SM Options central IN THIS W I N T E R 2 0 0 2 ISSUE: F E A T U R E : A N O P P O R T U N I S T I C O P T I O N S C O M B O F O R Q Q Q W I N T E

### b. June expiration: 95-23 = 95 + 23/32 % = 95.71875% or.9571875.9571875 X \$100,000 = \$95,718.75.

ANSWERS FOR FINANCIAL RISK MANAGEMENT A. 2-4 Value of T-bond Futures Contracts a. March expiration: The settle price is stated as a percentage of the face value of the bond with the final "27" being read

### Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.

OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss

### Steve Meizinger. FX Options Pricing, what does it Mean?

Steve Meizinger FX Options Pricing, what does it Mean? For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or

### How To Understand The Greeks

ETF Trend Trading Option Basics Part Two The Greeks Option Basics Separate Sections 1. Option Basics 2. The Greeks 3. Pricing 4. Types of Option Trades The Greeks A simple perspective on the 5 Greeks 1.

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 non-dividend paying stock

### ECMC49F Options Practice Questions Suggested Solution Date: Nov 14, 2005

ECMC49F Options Practice Questions Suggested Solution Date: Nov 14, 2005 Options: General [1] Define the following terms associated with options: a. Option An option is a contract which gives the holder

### Option Valuation. Chapter 21

Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of in-the-money options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price

### Option Contract Adjustments New Methods as of September 2007. Presented by The Options Industry Council

Option Contract Adjustments New Methods as of September 2007 Presented by The Options Industry Council Option Contract Adjustments Options involve risks and are not suitable for everyone. Prior to buying

### FINANCIAL ENGINEERING CLUB TRADING 201

FINANCIAL ENGINEERING CLUB TRADING 201 STOCK PRICING It s all about volatility Volatility is the measure of how much a stock moves The implied volatility (IV) of a stock represents a 1 standard deviation

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

### Spotlight Quiz. Hedging with Options

Spotlight Quiz Hedging with Options Many companies use options to hedge cashflows, either singly or in combination. This quiz will cover the use of single options first and then look at possible combinations.

### Understanding Stock Options

Understanding Stock Options Introduction...2 Benefits Of Exchange-Traded Options... 4 Options Compared To Common Stocks... 6 What Is An Option... 7 Basic Strategies... 12 Conclusion...20 Glossary...22

### GAMMA.0279 THETA 8.9173 VEGA 9.9144 RHO 3.5985

14 Option Sensitivities and Option Hedging Answers to Questions and Problems 1. Consider Call A, with: X \$70; r 0.06; T t 90 days; 0.4; and S \$60. Compute the price, DELTA, GAMMA, THETA, VEGA, and RHO

### Option Basics: A Crash Course in Option Mechanics

1 chapter # 1 Option Basics: A Crash Course in Option Mechanics The concept of options has been around for a long time. Ancient Romans, Greeks, and Phoenicians traded options based on outgoing cargoes

### Who 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

### Week 13 Introduction to the Greeks and Portfolio Management:

Week 13 Introduction to the Greeks and Portfolio Management: Hull, Ch. 17; Poitras, Ch.9: I, IIA, IIB, III. 1 Introduction to the Greeks and Portfolio Management Objective: To explain how derivative portfolios

### Investment Finance 421-002 Prototype Midterm I

Investment Finance 421-002 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.

### Online 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

### CHAPTER 21: OPTION VALUATION

CHAPTER 21: OPTION VALUATION PROBLEM SETS 1. The value of a put option also increases with the volatility of the stock. We see this from the put-call parity theorem as follows: P = C S + PV(X) + PV(Dividends)

### Equity Option Expiration. Presented by The Options Industry Council

Equity Option Expiration Presented by The Options Industry Council Equity Option Expiration - Disclaimer Options involve risks and are not suitable for everyone. Prior to buying or selling options, an

### THE 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 In-the-money, At-the-money,

### OPTIONS EDUCATION GLOBAL

OPTIONS EDUCATION GLOBAL TABLE OF CONTENTS Introduction What are FX Options? Trading 101 ITM, ATM and OTM Options Trading Strategies Glossary Contact Information 3 5 6 8 9 10 16 HIGH RISK WARNING: Before

### Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS

Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS 8-1 a. An option is a contract which gives its holder the right to buy or sell an asset at some predetermined

### Session 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

### Understanding Options Gamma to Boost Returns. Maximizing Gamma. The Optimum Options for Accelerated Growth

Understanding Options Gamma to Boost Returns Maximizing Gamma The Optimum Options for Accelerated Growth Enhance Your Option Trading Returns by Maximizing Gamma Select the Optimum Options for Accelerated

### Overview. 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 No-arbitrage bounds on option prices Binomial option pricing Black-Scholes-Merton

### WHS 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

### Managing Currency Risks with Options

fx products Managing Currency Risks with Options John W. Labuszewski managing director Research and product development jlab@cmegroup.com cmegroup.com/fx This represents an overview of our currency options

### CHAPTER 15. Option Valuation

CHAPTER 15 Option Valuation Just what is an option worth? Actually, this is one of the more difficult questions in finance. Option valuation is an esoteric area of finance since it often involves complex

### UNDERSTANDING EQUITY OPTIONS

UNDERSTANDING EQUITY OPTIONS The Options Industry Council (OIC) is a non-profit association created to educate the investing public and brokers about the benefits and risks of exchange-traded options.

### FX, 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

### Summary of Interview Questions. 1. Does it matter if a company uses forwards, futures or other derivatives when hedging FX risk?

Summary of Interview Questions 1. Does it matter if a company uses forwards, futures or other derivatives when hedging FX risk? 2. Give me an example of how a company can use derivative instruments to

### Buying 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

### Contents. 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

### There 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

### 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,

### Options 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

### Chapter 3: Commodity Forwards and Futures

Chapter 3: Commodity Forwards and Futures In the previous chapter we study financial forward and futures contracts and we concluded that are all alike. Each commodity forward, however, has some unique

### Introduction 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

### Lecture Notes: Basic Concepts in Option Pricing - The Black and Scholes Model

Brunel University Msc., EC5504, Financial Engineering Prof Menelaos Karanasos Lecture Notes: Basic Concepts in Option Pricing - The Black and Scholes Model Recall that the price of an option is equal to

### BONUS REPORT#5. The Sell-Write Strategy

BONUS REPORT#5 The Sell-Write Strategy 1 The Sell-Write or Covered Put Strategy Many investors and traders would assume that the covered put or sellwrite strategy is the opposite strategy of the covered

### Equity Derivatives. Bringing. into Focus

Equity Derivatives Bringing into Focus Equity Derivative Research and Strategy Comments or questions on any of the material in this guide are welcomed and encouraged. Global Head of Equity Derivatives

### Mid-Term Spring 2003

Mid-Term Spring 2003 1. (1 point) You want to purchase XYZ stock at \$60 from your broker using as little of your own money as possible. If initial margin is 50% and you have \$3000 to invest, how many shares

### How To Calculate Financial Leverage Ratio

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

Pairs Trading Pairs trading refers to opposite positions in two different stocks or indices, that is, a long (bullish) position in one stock and another short (bearish) position in another stock. The objective

### Convenient Conventions

C: call value. P : put value. X: strike price. S: stock price. D: dividend. Convenient Conventions c 2015 Prof. Yuh-Dauh Lyuu, National Taiwan University Page 168 Payoff, Mathematically Speaking The payoff

### CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS

INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was \$.86 and the price of the June futures

### FX Key products Exotic Options Menu

FX Key products Exotic Options Menu Welcome to Exotic Options Over the last couple of years options have become an important tool for investors and hedgers in the foreign exchange market. With the growing

### How To Value Options In Black-Scholes Model

Option Pricing Basics Aswath Damodaran Aswath Damodaran 1 What is an option? An option provides the holder with the right to buy or sell a specified quantity of an underlying asset at a fixed price (called

### General Forex Glossary

General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without

GLOBAL TABLE OF CONTENTS Introduction Delta Delta as Hedge Ratio Gamma Other Letters Appendix 3 4 5 7 9 10 HIGH RISK WARNING: Before you decide to trade either foreign currency ( Forex ) or options, carefully

### Options Scanner Manual

Page 1 of 14 Options Scanner Manual Introduction The Options Scanner allows you to search all publicly traded US equities and indexes options--more than 170,000 options contracts--for trading opportunities

### FX Derivatives Terminology. Education Module: 5. Dated July 2002. FX Derivatives Terminology

Education Module: 5 Dated July 2002 Foreign Exchange Options Option Markets and Terminology A American Options American Options are options that are exercisable for early value at any time during the term

### INDEPENDENT. OBJECTIVE. RELIABLE. Options Basics & Essentials: The Beginners Guide to Trading Gold & Silver Options

INDEPENDENT. OBJECTIVE. RELIABLE. 1 About the ebook Creator Drew Rathgeber is a senior broker at Daniels Trading. He has been heavily involved in numerous facets of the silver & gold community for over

### Reference 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

TMX TRADING SIMULATOR QUICK GUIDE Reshaping Canada s Equities Trading Landscape OCTOBER 2014 Markets Hours All market data in the simulator is delayed by 15 minutes (except in special situations as the

### Underlying (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 Put-Call-Forward