Lecture 6

Lecture 6 - Lecture 6 Options Basics Option Strategies...

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Lecture 6 Options Basics Option Strategies
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Option Terminology A call option gives the holder the right, but not the obligation, to buy some underlying security at a pre-specified price and date (or range of dates). A put option gives the holder the right to sell. The strike price or exercise price of an option is the price at which the sale or purchase of the underlying security is made. The expiration date is the last day (and perhaps the only day) on which the option contract may be exercised. Listed options are all for 100 shares of the underlying asset.
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The price of an option is sometimes called the option’s premium . Writing and selling an option are synonymous. A European option may be exercised only on the expiration date. An American option may be exercised at any time up and until the expiration date. Buying the underlying, buying a call option, or selling a put option represents a bullish position in the underlying security. Short selling the underlying, writing a call option, or buying a put option represents a bearish position in the underlying security.
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Protective Put The price of XYZ is at $47. You are long 100 shares at that price, with a long-term bullish outlook. However, news has just been reported that earnings in the next quarter may slowdown . Your outlook about XYZ is bullish but you are concerned that with this latest report a sell-off of XYZ may be severe . What to do? Protective Put : Buy 1 XYZ January, $45 put at $4.50 This means: expiration date: 01/20/12, price of put: $4.50, number of shares per contract = 100, strike = $45 You have a net outflow of $4.50/share or $450.00 today
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Lecture 6 - Lecture 6 Options Basics Option Strategies...

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