options - Goals Options Spring 2007 Lecture Notes 4.6.1...

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1 Options Spring 2007 Lecture Notes 4.6.1 Readings:Mayo 28 Goals • Definitions • Options – Call option – Put option • Option strategies Derivatives: Definition Derivative : Any security whose payoff depends on any other security Goals • Definitions • Options – Call option – Put option • Option strategies
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2 Options • Two types – Call: Option to buy – Put: Option to sell • Parts: – Option price – Strike price – Expiration 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 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) 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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This note was uploaded on 01/02/2012 for the course FINANCE 347 taught by Professor Bayou during the Fall '11 term at NYU.

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options - Goals Options Spring 2007 Lecture Notes 4.6.1...

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