Derivatives09-1 - Options

Derivatives09-1 - Options - FINA222 Derivative Securities...

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FINA222 Derivative Securities Session 1. Options
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Session Outline Options Review of Options: Option Types, Position, Specifications Option Mechanics Terminology and Markets (Exchanges) Option Factors for Pricing Upper and Lower Bounds for Prices Key Arbitrage Arguments Put-Call Parity More discussions: Early Exercise, Dividends and American vs European style, Dividend and Stock split
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Review of Options Option Types A Call is an option (the right, not the obligation) to Buy A Put is an option (the right) to Sell A European option can be Exercised only at the End of its life An American option can be Exercised at Any time
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Option Types: Cont. Assets Underlying Exchange-Traded Options Stocks Foreign Currency Stock Indices Futures Commodities Indexes Interest Rates Currencies
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Option Positions Long call Long put Short call Short put
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Long Call on eBay Profit from buying one eBay European call option: option price = $5, strike price = $100 30 20 10 0 -5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($)
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Short Call on eBay Profit from writing one eBay European call option: option price = $5, strike price = $100 -30 -20 -10 0 5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($)
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Long Put on IBM Profit from buying an IBM European put option: option price = $7, strike price = $70 30 20 10 0 -7 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($)
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Short Put on IBM Profit from writing an IBM European put option: option price = $7, strike price = $70 -30 -20 -10 7 0 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($)
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Payoffs from Options K = Strike price, S T = Price of asset at maturity Payoff Payoff S T S T K K Payoff Payoff S T S T K K max (S T – K, 0) - max (S T – K, 0) = min (K – S T , 0) max ( K – S T , 0) - max ( K – S T , 0) = min (S T – K, 0) Long Call Short Call Long Put Short Put
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Specification of Options Expiration date Strike price European or American Call or Put (option class)
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Terminology Moneyness : At-the-money option In-the-money option Out-of-the-money option
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Terminology (continued) Option class : All option contracts of the same type (call or put) and Style (American or European) that cover the same underlying security. Option series : All option contracts of the same class that also have the same unit of trade, expiration date and strike price. Intrinsic value : The value of an option if it were to expire immediately. Time value : The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract - whatever value the option has in addition to its intrinsic value.
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Market Makers Most exchanges use market makers to facilitate options trading A market maker quotes both bid and ask prices when requested The market maker does not know whether the individual requesting the quotes wants to buy or sell
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Margin For Options with maturities less than 9-months, all
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This note was uploaded on 02/21/2010 for the course FINA 221 taught by Professor Na during the Spring '09 term at HKUST.

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Derivatives09-1 - Options - FINA222 Derivative Securities...

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