Fin9770BrighamCh23slides 41-61.ppt - Default Risk in options • Options Clearing Corporation(OCC For options traded on major exchanges(Amex NYSE OCC is

Fin9770BrighamCh23slides 41-61.ppt - Default Risk in...

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Default Risk in options Options Clearing Corporation (OCC) For options traded on major exchanges (Amex, NYSE), OCC is the counterparty to both sides of a trade. effectively, option buyer buys from OCC and option seller sells to OCC reduces the risk of default
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Option Price Quotes for Apple Computers (AAPL) on December 27, 2012 APPL(Apple Inc.) Closing stock price as of 12/27/2012 : $515.06 Calls Last Sale C call Intrinsic value Time value Puts Last sale C put Intrinsic Value Time value 13 Jan 510 $20.55 $5.06 $15.49 13 Jan 510 $15.45 $0.0 $15.45 13 Jan 515 $17.80 $.06 $17.74 13 Jan 515 $17.85 $0.0 $17.85 13 Jan 525 $13.67 $0.0 $13.67 13 Jan 525 $22.55 $9.94 $12.61 13 Feb 510 $32.20 $5.06 $27.14 13 Feb 510 $27.34 $0.0 $27.34 13 Feb 515 $29.65 $0.06 $29.59 13 Feb 515 $30.35 $0.0 $30.35 13 Feb 525 $24.75 $0.0 $24.75 13 Feb 525 $35.25 $9.94 $25.31
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Use of put options Protect(insure) against decline in stock values E.g. say you own a share of stock, current price is S 0 =$100. You think the price will rise, but it may go down. Buy a put option with E=$100, C PUT =$3 If stock declines to S T =$80, then payoff from cash settlement($100-$80)……$ 20 Value of your one share ........................................... 80 Total……………. $ 100 Cost of option=$3 is insurance premium. What if S T =$110 > E ? Slide show
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Use of put options: insurance with deductible Recall S 0 =$100 C PUT =$3 What if E=$96, (S T =$80) then: Insurance claim loss= $100- $80 ……….. $20 Reimbursement for loss ($96-$80)……… 16 Unreimbursed loss………………………$ 4 Why not buy a put with a higher E? Higher E raises C PUT (policy deductible)
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Question for you? You own 400 shares of stock that is currently selling at $20 per share. Investment=$8,000. You want an insurance policy with a $1,400 deductible. What exercise price should the put options have? Clicker coming
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Exercise price ? 1. $21.50 2. $18.50 3. $17.00 4. $16.50
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Selling a call option AKA: “writing a call” If you write a call with E=$100, the holder can buy at $100, so you may have to sell at $100 regardless of S T . Positive payoff to holder is negative payoff to writer. Say S T = $180 (share worth $180. You must sell it for $100) Covered call ( you already own the share sell ) Profit(loss) = ($100 - $180) + C call = -$80 + C call note that if you bought the stock at say $100 = E when the call was written, you had an $80 appreciation on your investment Uncovered call: (you must first buy the share you sell) Buying at $180 and selling at $100 Profit(loss)= ( $100- $180) + C call = -$80 + C CALL .
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