MGTC71-7 - Review of Option Types ECMC71-Lecture 7 A call...

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1 ECMC71-Lecture 7 Options Markets: Mechanisms and Properties Ata Mazaheri 2 Review of Option Types • A call is an option to buy • A put is an option to sell • A European option can be exercised only at the end of its life • An American option can be exercised at any time 3 Option Positions • Long call • Long put • Short call • Short put 4 Long Call on eBay Profit from buying one eBay European call option: option price = $5, strike price = $100, option life = 2 months 30 20 10 0 -5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($) 5 Short Call on eBay Profit from writing one eBay European call option: option price = $5, strike price = $100 -30 -20 -10 0 5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($) 6 Long Put on IBM Profit from buying an IBM European put option: option price = $7, strike price = $70 30 20 10 0 -7 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($)
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7 Short Put on IBM Profit from writing an IBM European put option: option price = $7, strike price = $70 -30 -20 -10 7 0 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($) 8 Assets Underlying Exchange-Traded Options • Stocks • Foreign Currency • Stock Indices • Futures 9 Specification of Exchange-Traded Options • Expiration date • Strike price • European or American • Call or Put (option class) 10 Terminology
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MGTC71-7 - Review of Option Types ECMC71-Lecture 7 A call...

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