lecture 21

lecture 21 - Lecture 21 Options Prof Irvine FINA 4310...

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Prof Irvine FINA 4310 Lecture 21 Options
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Prof Irvine FINA 4310 Stocktrak mandatory trade Entered by market close – Monday November 8th l Your next Stocktrak mandatory trade will be using options to enhance the returns in your portfolio. l Enter into an option position in a stock you are already long in £ protective put £ covered call l Or a pure synthetic position - Bet that something happens £ straddle
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Prof Irvine FINA 4310 What is an option? l An option gives its owner (long) the right - but not the obligation – to buy (call) or sell (put) a stock for a specified price (strike)
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Prof Irvine FINA 4310 Option Terminology l Buy – Long Hold l Sell Short Write l Call l Put l Key Elements £ Strike Price – Expiration price £ Price £ Expiration £ Volatility
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Option Payoffs (Long call) S T C T S S-X
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Prof Irvine FINA 4310 Options Trading l Some options trade on over-the-counter (OTC) markets l Option contracts traded on exchanges are standardized l Most options trading in the U.S. take place on: £ Chicago Board Options Exchange http://www.cboe.com/ £ International Securities Exchange in New York £ http://www.iseoptions.com/
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Prof Irvine FINA 4310 Figure 15.1 Options on IBM March 2, 2007
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Prof Irvine FINA 4310 The Option Clearing Corporation l Jointly owned by the exchanges on which options are traded l The OCC places itself between options traders l OCC guarantees contract performance £ Thus option writers are required to post margin
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Prof Irvine FINA 4310 Market and Exercise Price Relationships In the Money - exercise of the option would be profitable Call: market price > exercise (strike) price Put: market price < exercise price Out of the Money - exercise of the option would not be profitable Call: market price < exercise price Put: market price > exercise price
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Prof Irvine FINA 4310 American vs European Options American - the option can be exercised at any time before expiration or maturity European - the option can only be exercised on the expiration or maturity date
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Prof Irvine FINA 4310 American vs European Options All but a few options are American - the reason European options are important is that you can value European options.
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lecture 21 - Lecture 21 Options Prof Irvine FINA 4310...

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