1 / 12

Options

Options. Chapter 19 Charles P. Jones, Investments: Analysis and Management, Eleventh Edition, John Wiley & Sons. 17- 1. Why Options Markets?. Financial derivative securities: derive all or part of their value from another (underlying) security

katharynj
Download Presentation

Options

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Options Chapter 19 Charles P. Jones, Investments: Analysis and Management, Eleventh Edition, John Wiley & Sons 17-1

  2. Why Options Markets? • Financial derivative securities: derive all or part of their value from another (underlying) security • Options are created by investors, sold to other investors • Why trade these indirect claims? • Expand investment opportunities, lower cost, increase leverage

  3. Options Terminology • Call (Put): Buyer has the right but not the obligation to purchase (sell) a fixed quantity from (to) the seller at a fixed price before a certain date • Exercise (strike) price: “fixed price” • Expiration (maturity) date: “certain date” • Option premium or price: paid by buyer to the seller to get the “right”

  4. How Options Work • Call buyer (seller) expects the price of the underlying security to increase (decrease or stay steady) • Put buyer (seller) expects the price of the underlying security to decrease (increase or stay steady) • At option maturity • Option may expire worthless, be exercised, or be sold

  5. Options Trading • Option exchanges are continuous primary and secondary markets • Chicago Board Options Exchange largest • Standardized exercise dates, exercise prices, and quantities • Facilitates offsetting positions through Options Clearing Corporation • OCC is guarantor, handles deliveries

  6. Profit per Option ($) 4 0 -4 Stock Price at Expiration 25 27 29 How does buying stock compare with buying a call option? Payoff Diagram for a Call Option Buyer Seller

  7. Profit per Option ($) Buyer 4 0 -4 Stock Price at Expiration 23 25 27 Seller How does selling stock compare with buying a put option? Payoff Diagram for Put Option

  8. Profit ($) Purchased share Combined 4 0 -4 Stock Price at Expiration 23 25 27 29 Written call Covered Call Writing

  9. Profit ($) Purchased share 4 0 -4 Combined Stock Price at Expiration 23 25 27 29 Purchased put Protective Put Buying

  10. Portfolio Insurance • Hedging strategy that provides a minimum return on the portfolio while keeping upside potential • Buy protective put that provides the minimum return • Put exercise price greater or less than the current portfolio value? • Problems in matching risk with contracts

  11. Profit ($) Purchased share Combined 2 0 -2 Stock Price at Expiration 23 25 27 29 Purchased put Portfolio Insurance

  12. Options Terminology • In-the-money options have a positive cash flow if exercised immediately • Call options: S >E • Put options: S <E • Out-of-the-money options should not be exercised immediately • Call options: S <E • Put options: S >E

More Related