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Lecture9_Option - NBA 6730 Derivative Securities Lecture 9...

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1 NBA 6730: Derivative Securities Lecture 9: Introduction to Options 09/23/2010 George Gao NBA6730-Derivative Securities I 2 Agenda An option is a contract in which the seller (writer, short) grants the buyer (owner, long) certain contractual rights pertaining the underlying asset or primitive security. We study some basic properties of options in this lecture. Mechanics of options Properties of options Put-call parity
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2 NBA6730-Derivative Securities I 3 (1) Basic Types of Options A call option gives its owner the right (but not the obligation) to buy an asset at a fixed price (the exercise or strike price ) on or before a given date (the maturity or expiration date ) You can buy a contract or sell a contract: buy a call, or sell a call A put option gives its owner the right (but not the obligation) to sell an asset at a fixed price on or before a given date Buy a put, or sell a put The holder will not exercise his/her option unless the payoff is positive NBA6730-Derivative Securities I 4 (1) Basic Types of Options Timing of the contractual right European-style option: the holder of an option can only exercise when the contract expires American-style option: the holder of an option can exercise at any time up to and including the expiration Bermuda-style option: the holder of an option can exercise only on several specifically defined dates over the life of the option All exchange-traded equity options are American. Most index options are European (an exception is the S&P100 index option).
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