chpt17 - Options Chapter17 Jones,Investments:Analysis...

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Options Chapter 17 Jones, Investments: Analysis  and Management
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2 Why Options Markets? Financial derivative securities: derive  all or part of their value from another  (underlying) security Options are created by investors,  sold to other investors Why trade these indirect claims? Expand investment opportunities, lower  cost, increase leverage
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3 Options Terminology Call  (Put) : Buyer has the right but not  the obligation to purchase  (sell)  a  fixed quantity from  (to)  the seller at a  fixed price before a certain date Exercise (strike) price: “fixed price” Expiration (maturity) date: “certain  date” Option premium or price: paid by  buyer to the seller to get the “right”
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4 How Options Work Call buyer (seller) expects the price  of the underlying security to increase  (decrease or stay steady) Put buyer (seller) expects the price of  the underlying security to decrease  (increase or stay steady) At option maturity Option may expire worthless, be  exercised, or be sold
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5 Options Trading Option exchanges are continuous  primary and secondary markets Chicago Board Options Exchange  largest Standardized exercise dates,  exercise prices, and quantities Facilitates offsetting positions through  Options Clearing Corporation » OCC is guarantor, handles deliveries
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