Option1 - out to be less than the $430 exercise price,...

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Chapter 20: Understanding Options There are two types of options: Put and Calls. Call Options and Position Diagrams A call options gives its owner the right to buy the stock at a specified exercise or strike price on or before a specified maturity date. If the option can be exercised only at maturity, it is a European Call, in other cases the option can be exercised on or at any time before maturity – American Call. The position diagram above shows the possible consequences of investing in a call option with an exercise price of $430. The outcome of investing in this company depends on what happens to the stock price. If the stock at the end of the period turns
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Unformatted text preview: out to be less than the $430 exercise price, nobody will pay $430 to obtain the share via the call option. Your call in this case will be valueless. On the other hand if the share price rises above $430, it will pay to exercise the option to buy to share. In this case, when the call expires, it will be worth the market price of the share less the $430 that you must pay to acquire it. Eg. Suppose that the price of Google stock rises to $500. Your call will be worth $500 - $430 = $70. That is your payoff, but it is not all profit there is the price that you have to pay for the option....
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This note was uploaded on 08/20/2011 for the course ECON 101 taught by Professor Mrsmith during the Two '11 term at University of Sydney.

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