1008062-Cor-5_v4 - Equity Derivatives and Related Products...

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Unformatted text preview: Equity Derivatives and Related Products Class 5: Options Valuation Mark Zurack September 28, 2010 1002011-MBA-5 2 Class Objectives To explain basic properties of options like intrinsic value, time premium, time and insurance value, and an options delta and gamma Introduce Options Valuation by breaking down the components of an Options price Describe what Delta is and why it is important Extend our discussion on options valuation to put/call parity and forward prices to show how arbitrage forces affect put and call prices as well as many strategies To show how a stocks volatility and forward price affects its distribution of future prices which is the basis of its valuation Review how Delta Hedging creates profits and losses for traders Show the class how to use an Options Calculator, emphasizing the shortfall and financing cost of hedging the options 1008062-Cor-5 1002011-MBA-5 3 ISE Discussion Questions Which client base was the driving force behind the ISE? What benefit did they feel an electronic exchange would provide? Did other options clients support the ISE? Why? What is the cross listing of options? Did the ISE accelerate the process of cross-listing? What is the OCC? Why is it important to the success of the options business? How does it differ from the clearing process in the futures market? 1008061-Cor-4 1002011-MBA-5 An Intuitive Explanation of Options Pricing Components of an Option Price Intrinsic Value The difference between the market value of the underlying security and the exercise price or strike price for a call option. Options at-the- money or out-of-the-money have no intrinsic value Time Premium The amount exceeding the intrinsic value that a buyer is willing to pay for the cost of carry available in the option instead of owning the stock outright and the insurance charge which limits losses to the options premium only. Related to the volatility of the underlying stock Strike Price Time Premium Intrinsic Value = Expiration Value Call Value Underlying Price 4 1008061-Cor-4 1002011-MBA-5 Components of an Option Price With AAPL trading at 208, the Nov. 190 strike calls have an intrinsic value of 18 and time premium of 1.5, using the offered side of the market. Source: Yahoo Finance, 10/21/09 Strike Last Bid Ask Vol Open Int 170 38.05 38.20 38.35 898 2,682 175 32.55 33.45 33.60 1,236 3,067 180 28.25 28.60 28.70 2,941 6,798 185 23.80 23.70 23.85 6,904 14,481 190 19.20 19.35 19.50 8,947 20,864 195 15.00 15.10 15.20 18,074 21,633 200 11.35 11.40 11.45 37,948 44,257 210 5.55 5.50 5.60 45,110 40,139 220 2.23 2.21 2.24 32,888 23,990 Call Options Expire at close Fri, Nov. 20, 2009 5 1008061-Cor-4 1002011-MBA-5...
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1008062-Cor-5_v4 - Equity Derivatives and Related Products...

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