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Lecture 11 notes Oct 24

# Lecture 11 notes Oct 24 - Strike price on call \$20 Y ield =...

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Yield = \$1381 \$ 459 = 301% Strike price on call \$20: Mkt \$20 “ at the money” Mkt \$24 “ in the money” Mkt \$16 “ out of the money” Put Option o o Example: LMN Selling @ \$51/sh, you think price will drop Purchase 1 LMN Dec/50 Put at 4.50price decreases to \$30/sh 4 months later exercise option: - buy 100 shares in market @ \$30 share \$3000 - sell 100 shares to writer @ \$50 strike price \$5000 \$2000 Less: Premium 450 2% IN 60 2% OUT 100 2% on premium 9 \$1381 o What determines option premiums in the Real World? An options premium in the real world is a function of two things: The Intrinsic Value of the option The Time Value of the option Therefore the following equation always holds true: Premium – Intrinsic Value + Time Value o Intrinsic Value of an option: the extent to which the option contract is currently “in the money”

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o Determined by the current relationship between the striking price of the option contract (fixed) and the current market price of the underlying security (the stock on which the option is written which is variable o Example: ABC April 30 Call at \$5
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Lecture 11 notes Oct 24 - Strike price on call \$20 Y ield =...

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