Ch20 - Option Chapter 20 Introduction Buy - Long Sell -...

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Option Chapter 20
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Introduction Buy - Long Sell - Short Call – the right to buy underlying asset at ex. price Put – the right to sell underlying asset at ex. price Key Elements The underlying asset Exercise or Strike Price Premium or Price Maturity or Expiration date
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American option vs European option 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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Notation Stock Price = S T Exercise Price = X Payoff to Call Holder ( S T - X) if S T >X 0 if S T < X Profit to Call Holder (Payoff - Purchase Price) Payoffs and Profits at Expiration - Calls
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Payoff to Call Writer - ( S T - X) if S T >X 0 if S T < X Profit to Call Writer Payoff + Premium Payoffs and Profits at Expiration - Calls
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Stock Price 0 Call Writer Call Holder Profit Profiles for Calls
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Payoff at expiration-Call Stock Price 0 C=max[0,S t -X] X
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Payoffs and Profits at Expiration - Puts Payoffs to Put Holder 0 if S T > X (X - S T ) if S T < X Profit to Put Holder Payoff - Premium
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Ch20 - Option Chapter 20 Introduction Buy - Long Sell -...

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