Contemporary Investments: Chapter 15
Chapter 15 FUNDAMENTALS OF OPTIONS
• What are the basic characteristics of option contracts?
• What is the value of option at expiration?
• What are some common option trading strategies?
• How are options valued?
• What other securities resemble options?
Contemporary Investments: Chapter 15
The basic characteristics of option contracts
• Option trading
– The positions and obligations
– The workings of option markets
– Option price quotations
Contemporary Investments: Chapter 15
Figure 15.1 – Option Price Quotes from the Wall Street Journal
Contemporary Investments: Chapter 15
Options on other securities
• Index options
• Foreign currency options
• Long-term options
Contemporary Investments: Chapter 15
Figure 15.2 – Price Quotes for Index Options
Contemporary Investments: Chapter 15
Option value at expiration
• Valuing calls and puts at expiration
– Call option value at expiration
– Put option value at expiration
Contemporary Investments: Chapter 15
Calculating the profit and loss from an option
• Buying a call option
• Writing a call option
• Buying a put option
• Writing a put option
Contemporary Investments: Chapter 15
Figure 15.3 – Profit (Loss) from Buying or Writing a 25 October GE Call Option at Expiration
Contemporary Investments: Chapter 15
Figure 15.4 – Profit (Loss) from Buying or Writing a 25 October GE Put Option at Expiration
Contemporary Investments: Chapter 15
Common option trading strategies– Some unique risks and opportunities of
options
– Strategies involving just one option contract
– Straddles
– Spreads
• Money spreads
• Why trade spreads?
Contemporary Investments: Chapter 15
Figure 15.5 – Holding Period Return from GE Common Stock and a 25 GE Call Option
Contemporary Investments: Chapter 15
Combining option and stock options
• Writing covered calls
• Protective puts
• Covered short sales
Contemporary Investments: Chapter 15
Figure 15.6 – Holding Period Returns from GE 22.5 and 25 October Call Options
Contemporary Investments: Chapter 15
Figure 15.7 – Profit or Loss from Long Straddle (Buying) and Reverse Straddle (Writing)
Contemporary Investments: Chapter 15
Figure 15.8 – Profit or Loss from a Bull Spread or Bear Spread
Contemporary Investments: Chapter 15
Pricing options
• Determinants of option values
– Price of the underlying stock
– Exercise price
– Time until expiration
– Volatility of the underlying stock
– Level of interest rates
– Dividends
Contemporary Investments: Chapter 15
Black-Scholes Option Pricing Model• Black-Scholes pricing model for European
calls.
• Loose interpretation of the Black-Scholes model.
• Determinants of the fundamental value of an option.
• Applying the Black-Scholes formula
• Arbitrage strategy using the Black-Scholes model.
Contemporary Investments: Chapter 15
Other securities that resemble options
• Convertible securities
– Valuing a convertible security.
–Why buy convertibles?
• Warrants
Contemporary Investments: Chapter 15
Figure 15.9 – Valuing a Convertible Bond
Top Related