18 Introduction to Options

18 Introduction to Options - Introduction to Options 1...

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Comm367 1 Introduction to Options
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Comm367 2 Nature of Derivatives u Value of the instrument depends on the values of other more basic underlying variables u Example of derivatives Forward Contract: calls for future delivery of an asset at an agreed price. Futures Contracts: calls for future delivery of an asset at an agreed price, in a standardized, margined, marked-to-market (settled daily) format Options: the right but not the obligation to buy/sell at a specified strike price on or before a specified date Swaps: an exchange of payments
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Comm367 3 Basic Characteristics of Options u A call option is an option to buy a certain asset by a certain date ( expiration date ) for a certain price (the strike price ) u A put option is an option to sell a certain asset by a certain date for a certain price u Buying or selling the underlying asset via the option is exercising the option. u An American option may be exercised at any time up to and including the expiration date. u A European option can be exercised only on the expiration date
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Comm367 4 Buy - Long Sell - Short Call Put Key Elements Exercise or Strike Price Premium or Price Maturity or Expiration Option Terminology
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Comm367 5 u http://www.nyse.com/about/listed/anf.html Investopedia: Trade Options, Enter Symbol “ANF”, View Option Chain, Select Option
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Comm367 6 In the Money - exercise of the option would be profitable Call: market price > exercise 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 At the Money - exercise price and asset price are equal Market and Exercise Price Relationships
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Comm367 7 In/Out of the Money In-the-money options have a positive cash flow if exercised immediately Call options: ST > X Put options: ST < X Out-of-the-money options should not be exercised immediately Call options: ST < X Put options: ST > X If ST = X, an option is at the money
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Comm367 8 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 American vs. European Options
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This note was uploaded on 08/03/2011 for the course ECON 503 taught by Professor Motherfucker during the Spring '11 term at Aarhus Universitet.

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18 Introduction to Options - Introduction to Options 1...

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