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A Basic Options Review

A Basic Options Review. Options. Right to Buy/Sell a specified asset at a known price on or before a specified date . Call Option - Right to buy Put Option - Right to sell When Option Bought/Sold, Premium is exchanged. Option Specifications.

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A Basic Options Review

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  1. A Basic Options Review

  2. Options • Right to Buy/Sell a specified asset at a known price on or before a specified date. • Call Option - Right to buy • Put Option - Right to sell • When Option Bought/Sold, Premium is exchanged.

  3. Option Specifications • Current Price of Specified Asset - S(S as we consider options on stocks first) • Specified Price of Buy/Sell - X(or Strike Price, so some use K) • Last time to Buy/Sell – Expiry ( T ) (or Expiration date) • Note: There will be other factors when we actually start calculating prices, but for now we will take all market prices as given.

  4. Basic Option Payoffs: Call Option Out of the Money In the Money Payoff Payoff Price Price Current Stock Price Option Exercise Price Stock Payoffs Call Option Payoffs Call Option Payoff = Max[ 0 , S - X ] (Intrinsic Value)

  5. Basic Option Payoffs: Put Option In the Money Out of the Money Payoff Payoff Price Price Current Stock Price Option Exercise Price Stock Payoffs Put Option Payoffs Put Option Payoff = Max[ 0 , X - S ] (Intrinsic Value)

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