Chap024s-1

Chap024s-1 - Options and Corporate Finance Chapter 24 1...

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Options and Corporate Finance Chapter 24 1
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Option Terminology (Underlying) Stock Price (S) Call Put Strike or Exercise price (E) Expiration date Option premium Option writer American Option European Option 2
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Stock Option Quotations Look at Table 24.1 in the book Price and volume information for calls and puts with the same strike and expiration is provided on the same line Things to notice Prices are higher for options with the same strike price but longer expirations Call options with strikes less than the current price are worth more than the corresponding puts Call options with strikes greater than the current price are worth less than the corresponding puts 3
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Option Payoffs – Calls The value of the call at expiration is the intrinsic value Max(0, S-E) If S<E, then the payoff is 0 If S>E, then the payoff is S – E In this graph, the exercise price is $35 Call Option Payoff Diagram 0 5 10 15 20 0 10 20 30 40 50 60 Stock Price Call Value 4
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Option Payoffs - Puts The value of a put at expiration is the intrinsic value Max(0, E-S) If S<E, then the payoff is E-S If S>E, then the payoff is 0 In this graph, the exercise price is $35 Payoff Diagram for Put Options 0 10 20 30 40 0 10 20 30 40 50 60 Stock Price Option Value 5
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Work the Web Example Where can we find option prices? On the Internet, of course. One site that provides option prices is Yahoo Finance Click on the web surfer to go to Yahoo Finance Enter a ticker symbol to get a basic quote Follow the options link Check out “symbology” to see how the ticker symbols are formed 6
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Call Option Bounds Upper bound Call price must be less than or equal to the stock
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Chap024s-1 - Options and Corporate Finance Chapter 24 1...

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