options - Options Spring 2007 Lecture Notes 4.6.1...

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Options Spring 2007 Lecture Notes 4.6.1 Readings:Mayo 28
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Goals Definitions Options Call option Put option Option strategies
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Derivatives: Definition Derivative : Any security whose payoff depends on any other security
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Goals Definitions Options Call option Put option Option strategies
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Options Two types Call: Option to buy Put: Option to sell Parts: Option price Strike price Expiration
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Call Option Option to purchase asset at the strike price Horizon:(two types) American : Anytime between now and the expiration date European : On the expiration date only Strike price : Price at which the security can be purchased
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Example: Buying a call option on Amazon Amazon share price = $100 Purchase American call option Option price = $5 Strike price = $120 Expiration = 2 months from now Case A: price goes to $150 Exercise option Buy at $120, sell at $150 Total = 150-120-5 = +$25 Case B: price goes to $50 Don’t exercise option Total = -5 (lose entire investment)
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Example: Writing (selling) a call option on Amazon Amazon share price = $100 Write American call option Option price = $5 Strike price = $120 Expiration = 2 months from now Case A: price goes to $150 Purchaser exercises option Buy at $150, sell at $120 Total = -150+120+5 = -25 Case B: price goes to $50 Purchaser doesn’t exercise option Total = +5
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options - Options Spring 2007 Lecture Notes 4.6.1...

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