PPT 4 - 4. Op&ons Reading: Chapter 12, Chapter 11 of...

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4. Op&ons Reading: Chapter 12, Chapter 11 of Luenberger 1
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4.1 Options types • 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
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Option Positions • Long call • Long put • Short call • Short put 3
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Long Call Profit from buying one European call option: option price = $5, strike price = $100, option life = 2 months 4 30 20 10 0 -5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($)
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Short Call Profit from writing one European call option: option price = $5, strike price = $100 5 -30 -20 -10 0 5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($)
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Long Put Profit from buying a European put option: option price = $7, strike price = $70 6 30 20 10 0 -7 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($)
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Short Put Profit from writing a European put option: option price = $7, strike price = $70 7 -30 -20 -10 7 0 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($)
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Payofs From Op&ons What is the Op&on Posi&on in Each Case? K = Strike price, S T = Price of asset at maturity 8 Payoff Payoff S T S T K K Payoff Payoff S T S T K K
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Assets Underlying Exchange-Traded Options • Stocks • Foreign Currency • Stock Indices • Futures 9
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This note was uploaded on 03/23/2012 for the course AMATH 541 taught by Professor Kk.t during the Winter '11 term at University of Washington.

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PPT 4 - 4. Op&ons Reading: Chapter 12, Chapter 11 of...

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