FINS 2624 Study Notes Compressed

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Unformatted text preview: of this session is on exchange-traded options. T YPES OF OPTIONS Call options entitles the owner/holder of the option the right to purchase the underlying stock at a predetermined price from the party writing or selling the option. Put options entitles the owner/holder of the option the right to sell the underlying stock at a predetermined price to the party selling/writing the option. Expiration date is the date where the right will terminate and the option expires. Exercise price or strike price is the predetermined price where the price is fixed over the option’s life irrespective of the value of the stock American option where right can be exercised at any point in time between settlement and expiration date. European options where the right to exercise is confined to the expiration date. This type of options are LEPO. I NDIVIDUAL OPTION SERIES AND CLASSES OF OPTIONS For each stock and each type of related options, there are number of option series that are distinguished by their unique exercise prices and/or expiration months. For each stock, there are 2 classes of options, e.g. call options and put options. In Australia, the expiration date falls on the Thursday that precedes the last Friday of the expiration month. All stock options are American options and the size of each option is 1000 shares. Long a stock – look at Ask Price Short a stock – look at Bid Price P REMIUM, INTRINSIC VALUE AND TIME VALUE OF AN OPTION Premium – the price of the option = Intrinsic Value + Time Value Long – you are the holder or the buyer. Short – you are the writer or the seller. Intrinsic Value – measures the exercise value of an option. The intrinsic value is defined as: Max {St – X, 0} for a call – St (Stock Price) should be higher than X (exercise price) for it to have value Max {X – St, 0} for a put – St should be lower than X for it to have value 10 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 An option is described as: In the money when S>X for a call, and S&l...
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This document was uploaded on 03/21/2014.

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