300 Finance Financial Markets
Lecture 27 Professor J. Petry, Fall 2001 http://www.cba.uiuc.edu/broker/fin300/fin300p htm
Chapter IX Options
Option 50 50 50 50 50 50 50 50 50 50 50 IBM Strike Expiration 40 Dec 40 Jan 40 Apr 45 Nov 45 Dec 45 Jan 45 Apr 50 Nov 50 Dec 50 Jan 50 Apr Call Vol Last 7 10 1/16 122 10 1/8 56 10 1/4 1793 5 220 5 1/8 768 5 3/4 359 6 1/2 10012 7/8 1655 1 3/4 2179 2 9/16 444 3 5/8 Put Vol Last 275 1/16 282 3/16 41 1/2 1130 1/8 504 3/8 432 3/4 .... .... 4608 1 1/16 379 1 13/16 283 2 9/16 271 3 5/8
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Chapter IX Options
Options Terminology
Option Buy Buys the option, thus pays premium to writer Write (Sell) Sells the option, thus receives premium from buyer if exercised . . . . .
Call buys right to buy shares from writer at strike price obligated to sell shares to buyer at strike price writer must sell shares to buyer
Put buys right to sell shares to writer at strike price obligated to buy shares from the buyer at strike price writer must buy shares from the buyer
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Chapter IX Options
Things to Do: IX-1
Explain the difference between buying a call option and writing a put option.
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Chapter IX Options
Options Strategies: Equity Strategy: Buy IBM Call Options Buy Shares of IBM Strike Price: In the Money: At the Money: Out of the Money: $40 $50 $60 Initial Investment: -1,102.50 -256.25 -37.5 -5,000 $30 option expires option expires option expires 3,000 profit -1,102.50 -256.25 -37.5 -2,000 $40 option expires option expires option expires 4,000 profit -1,012.50 -256.25 -37.5 -1,000 $50 option expires option expires exercise -4,000 stock value 5,000 5,000 profit -12.50 -265.25 -37.5 0 $60 option expires exercise -4,000 -5,000 stock value 6,000 6,000 6,000 profit 987.50 743.75 -37.5 1,000 $70 exercise -4,000 -5,000 -6,000 stock value 7,000 7,000 7,000 7,000 profit 1,987.50 1,743.75 962.50 2,000 Rate of return -100% to 196% -100% to 681% -100% to 2,567% -40% to +40% 5 Strategy
Chapter IX Options
Strategy Strike Price: Initial Investment: $30 profit $40 profit $50 exercise stock value profit $60 exercise stock value profit $70 exercise stock value profit Rate of return Options Strategies: Write IBM Call Options In the Money: At the Money: Out of the Money: $40 $50 $60 1,102.50 37.5 option expires option expires 1,102.50 37.5 option expires option expires 1,012.50 37.5 option expires 4,000 -5,000 12.50 37.5 option expires 4,000 -6,000 -987.50 37.5 4,000 -7,000 -1,987.50 -99% to 51% 6,000 -7,000 -962.50 -48% to 2% Equity Strategy: Sell IBM Short 5,000 -3,000 2,000 -4,000 1,000
5,000 0
-6,000 -1,000
-87% to 13%
-7,000 -2,000 -100% to +100%
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*option p/l assumes $2,000 margin requirement
Chapter IX Options
Things to Do: IX-2
Assume that in September you wrote ten January IBM call options at a strike price of $40 and a premium of 10 1/8. John Q. Investor was the buyer. Suppose that on the last trading date before expiry IBM was trading at $45. A. Is this an in or an out-of-the money option? B. Will J.Q. exercise these options? C. What is J.Q.s profit on this transaction? D. What would J.Q. profit be on this transaction if he did not exercise these options? E. What is your profit on this transaction?
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Chapter IX Options
Strategy Strike Price: Initial Investment: $30 buy stock profit exercise $40 buy stock exercise profit $50 buy stock exercise profit $60 buy stock exercise profit $70 buy stock exercise profit Rate of return Options Strategies: Equity Strategy: Buy IBM Put Options Sell IBM Short In the Money: At the Money: Out of the Money: $40 $50 $60 -18.75 -256.25 -1,006.25 5,000 -3,000 -3,000 -3,000 -3,000 4,000 5,000 6,000 981.25 1,743.75 1,993.75 2,000 -4,000 -4,000 -4,000 option expires 5,000 6,000 -18.75 743.75 993.75 1,000
option expires option expires -18.75 -256.25 option expires option expires -18.75 -256.25 5,133% to -100% 580% to -100%
option expires -1,006.25 option expires -1006.25 198% to -100%
-6,000 -1,000 -7,000 -2,000 -80% to +80%
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*outright p/l assumes $5,000 from sale plus $2,500 in margin requirement
Chapter IX Options
Strategy Strike Price: Initial Investment: $30 exercise stock value profit $40 exercise stock value profit $50 exercise stock value profit $60 exercise stock value profit $70 exercise stock value profit Rate of return Options Strategies: Equity Strategy: Write IBM Put Options Buy IBM Shares In the Money: At the Money: Out of the Money: $40 $50 $60 18.75 256.25 -5,000 -4,000 -5,000 3,000 3,000 3,000 -981.25 -1,743.75 -2,000 -5,000 option expires 4,000 4,000 18.75 -743.75 -1,000 option expires option expires 18.75 256.25 option expires option expires 18.75 256.25 option expires option expires 18.75 256.25 -49% to 1% 580% to -100% 5,000 0 6,000 1,000 7,000 2,000 -80% to +80%
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198% to -100%
*p/l on options assumes $2,000 margin requirement
Chapter IX Options
Strategy Strike Price: Initial Investment: stock purchase premium $30 exercise stock value profit $40 exercise stock value profit $50 exercise stock value profit $60 exercise stock value profit $70 exercise stock value profit Rate of return Options Strategies: Equity Strategy: Buy IBM and Hedge with a Put Option Buy IBM Shares In the Money: At the Money: Out of the Money: $40 $50 $60 -5,000 -18.75 4,000 -1,108.75 4,000 -1,018.75 5,000 -18.75 6,000 981.25 -5,000 -256.25 5,000 -256.25 5,000 -256.25 5,000 -256.25 6,000 743.75 -5,000 -1,006.25 6,000 -6.25 6,000 -6.25 6,000 -6.25 6,000 -6.25 -5,000
3,000 -2,000 4,000 -1,000 5,000 0 6,000 1,000
-20% to 39%
-5% to 33%
.4% to 17%
10 -40% to +40%
*p/l on options assumes $2,000 margin requirement
Chapter IX Options
Options Strategies: Collar on 10,000 shares of IBM (Buy a put, Write a call) Initial Investment: Buy a protective put on shares already owned (buy 100 $40 April puts) Write enough call options to pay for the put (write 62 $60 April calls) Net new investment: $30 exercise put, selling shares at $40 call expires retained premium profit $50 market value of shares let put expire call expires retained premium profit $70 let put expire call is exercised, forced to sell 6,200 shares at $60 remaining 3,800 shares valued at market price retained premium profit $90 let put expire call is exercised, forced to sell 6,200 shares at $60 remaining 3,800 shares valued at market price retained premium profit -5,000.00 5,037.50 37.50 400,000 37.50 400,037.50 500,000
37.50 500,037.50 372,000 266,000 37.50 638,037.50 372,000 342,000 37.50 11 714,037.50
Chapter IX Options
Things to Do
Graph the payout diagram for this transaction.
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