Lecture_1___An_Introduction_to_Options_MFIN

Lecture_1___An_Introduction_to_Options_MFIN - Options An...

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Options An Introduction to Options Salvatore Cantale 1 Tulane University A.B. Freeman School of Business Options: Basic Concepts Salvatore Cantale 1 Option: Definition Options Agenda 1. a. Call Options b. Put Options 2. Option Combination 2
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Options An Introduction to Options Salvatore Cantale 2 Options Definition: Call Option A European Cal Option i contrac which give it A European Call Option is a contract which gives its owner (the buyer) the right to buy an asset (the underlying) at a pre-specified price (the exercise price or strike price) on a pre-specified day (expiration day). An American Option is like a European option except it can b exercised any tim prio to expiration 3 can be exercised any time prior to expiration. Options Example: IBM Call Option, January 10 2007 Last Trade: 98.37 Day's Range: 97.93 - 99.03 Trade Time: 12:32PM ET 52wk Range: 72.73 - 100.3 Change: - 1.70 (1.70%) 4 Volume: 4,685,000
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Options An Introduction to Options Salvatore Cantale 3 Options Example: IBM Call Option You buy on January 10 2007 a call option written on IBM You buy on January 10, 2007 a call option written on IBM stock, giving you the right to buy 1 share of IBM with the following characteristics: Price of IBM Stock on January 10: $98.37 5 Strike Price (K): $100 Maturity: February 16, 2007 Options Example: Call Option at Expiration A Call Option gives its holder the right to buy a Value of the Option share of IBM for $100. If the exercise price is higher than the stock price at expiration, there is no reason to exercise this option, and the payoff of the option is ZERO! 6 $100 Stock Price
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Options An Introduction to Options Salvatore Cantale 4 Options Example: Call Option at Expiration A Call Option gives its holder the right to buy a share of IBM for $100. Value of the Option If the exercise price is lower than the stock price at expiration, then exercising the option translates to buy a share of IBM for only $100 (that is, at a lower price than the market value). Therefore, the option will be exercised and the payoffs to the holders will be Stock Price minus the Exercise Price! 7 $100 Stock Price Options Example: Call Option’s Payoffs at Expiration Stock Price at Expiration Call Option LESS THAN $100 0 HIGHER THAN $100 Stock Price – 100 8 That is, the payoff of a call option at expiration: Max(0, S T –K)
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Options An Introduction to Options Salvatore Cantale 5 Options Example: Call Option at Expiration Vl f th BC l l O i Value of the Option Buy a Call Option! K = $100 9 Stock Price Sell a Call Option! Options Definition: Put Option A European Pu Option i contrac which give it owne A European Put Option is a contract which gives its owner (the buyer) the right to sell an asset (the underlying) at a pre-specified price (the exercise price or strike price) on a pre-specified day (expiration day). An American Option is like a European option except it can b exercised any tim prio to expiration 10 can be exercised any time prior to expiration.
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Options An Introduction to Options Salvatore Cantale 6 Options Example: HPQ Put Option You buy on January 10 2007 a put option written on IBM
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Lecture_1___An_Introduction_to_Options_MFIN - Options An...

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