FIN4520-Chapter9

FIN4520-Chapter9 - Mechanics of Options Markets Chapter 9 1...

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Unformatted text preview: Mechanics of Options Markets Chapter 9 1 Types of Options A call is an option to buy A put is an option to sell A European option can be exercised only at the end of its life An American option can be exercised at any time 2 Option Positions Long call Long put Short call Short put 3 Long Call Profit from buying one European call option: option price = $5, strike price = $100. 30 20 10-5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($) 4 Short Call Profit from writing one European call option: option price = $5, strike price = $100-30-20-10 5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($) 5 Long Put Profit from buying a European put option: option price = $7, strike price = $70 30 20 10-7 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($) 6 Short Put Profit from writing a European put option: option price = $7, strike price = $70-30-20-10 7 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($) 7 Payoffs from Options K = Strike price, S T = Price of asset at maturity Payoff Payoff S T S T K K Payoff Payoff S T S T K K 8 Assets Underlying Exchange-Traded Options Stocks Foreign Currency Stock Indices Futures 9 Specification of...
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FIN4520-Chapter9 - Mechanics of Options Markets Chapter 9 1...

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