FIN+4414+-+Options+-+Basics+-+Chapters+9+and+13

FIN+4414+-+Options+-+Basics+-+Chapters+9+and+13 - Options...

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Options: Basics
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Options - Basics Option Definitions : Call Options Put Options American Options European Options
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1968 - CBOT Diversification through Options 1973 - CBOE Began Trading Options Options - Basics
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B CB P&CB&DA W 500 562.50 575 ? Very Inefficient & Costly System Options - Basics
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Options - Basics Standardized Contracts : Expiration Date Standardized Price 100 Share Contracts Clearing Corporation
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Profit Stock Price - 5 Buyer of Call 115 120 125 Loss Calls: Profit and Loss
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Profit Stock Price Writer of Call 115 120 125 Covered Call (Solid) Naked Call (Dashed) - 115 +5 Calls: Profit and Loss
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Stock Price Buyer of Put 115 120 125 115 - 5 Loss Puts: Profit and Loss
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Profit Stock Price Writer of Put 115 120 125 - 115 +5 Puts: Profit and Loss
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Original Position Buy August 70 Call Buy August 70 Put Total Investment $2.50 $2.00 $4.50 Straddles
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- 4.5 Profit Buyer Straddles
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Profit 74.5 + 4.5 Loss Naked Straddle (Solid) Covered Straddle (Dashed) Writer Straddles
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Definitions C(S,T,E) P(S,T,E) Price of a Call Price of a Put Properties of Options
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Property 1 Because of limited liability, the price of an option cannot be less than zero. C(S,T,E) 0 Properties of Options
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Property 2 At expiration, an option will be equal to its intrinsic value. C(S,0,E) = Max(0,S-E) Properties of Options
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Property 3 Before expiration, an option will sell for at least its intrinsic value. C(S,T,E) Max(0,S-E) Properties of Options
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Property 4 An option with a longer time-to- expiration will be worth at least as much as an option with a shorter time-to-expiration. C(S,T 1 ,E) C(S,T 2 ,E) T 1 > T 2 where: Properties of Options
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Property 5 An option with a lower exercise price will be worth at least a much as an option with a higher exercise price. C(S,T,E 1 ) C(S,T,E 2 ) E 1 < E 2 where: Properties of Options
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Property 6 S C(S,T,E) T < and E > 0 If: Underlying stock will be worth at least as much as any option with a positive exercise price and a finite time to expiration.
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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FIN+4414+-+Options+-+Basics+-+Chapters+9+and+13 - Options...

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