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VIII: Options
24: Options
Chapter 24: Options © Oltheten & Waspi 2012
Computers Unlimited
Windows Surface
14” Display64GB
White coverOffice 2010
**** $1,999 ****
Good Til 12/31/12
Expiry Date: December 31, 2012
Type: American (if this said Good Only on 12/31/12 then it would be European)
Writer: Computers Unlimited
Strike Price: $1,999
Buyer: Coupon Holder
Item covered by the contract
Call Option
Chapter 24: Options © Oltheten & Waspi 2012
Intrinsic Value
The Intrinsic Value of the coupon is $1799 - $1999 = - $200
Out-of-the-money We throw the coupon away
(the option expires worthless)
Computers Unlimited
$1,799.00
$1,999.00
Chapter 24: Options © Oltheten & Waspi 2012
Intrinsic Value
The Intrinsic Value of the coupon is $1999 - $1999 = $0
At-the-money We throw the coupon away
(the option expires worthless)
Computers Unlimited
$1,999.00
$1,999.00
Chapter 24: Options © Oltheten & Waspi 2012
Intrinsic Value
The Intrinsic Value of the coupon is $2199 - $1999 = $200
In-the-money We use the coupon to purchase
at $1999. (exercise option) Computers Unlimited
$2,199.00
$1,999.00
Chapter 24: Options © Oltheten & Waspi 2012
-$400
-$200
$0
$200
$400
$1,599 $1,799 $1,999 $2,199 $2,399
Laptop Price
Option expires worthless
Exercise Option
Payout: Value & Profit
What is the breakeven price?
P
Chapter 24: Options © Oltheten & Waspi 2012
Options & Futures
Buy Futures
Sell Futures
Buy Soybeans
Sell Soybeans
Must buy
Must sell
Chapter 24: Options © Oltheten & Waspi 2012
Options & Futures
Buy Option
Sell Option
Buy shares
Sell shares
Buy Option
Sell Option
Sell shares
Buy shares
To buy or not to buy
To sell or not to sell
CALL
PUT
Chapter 24: Options © Oltheten & Waspi 2012
Options
Call option Contract that gives the buyer the right, but not
the obligation, to buy something at a specific price within a specific time.
Put option Contract that gives the buyer the right, but not
the obligation, to sell something at a specific price within a specific time.
Chapter 24: Options © Oltheten & Waspi 2012
Call 100 shares of General Electric (GE)**** $30 ****
Writer:_____________ Buyer:_____________Price: $_______per share
Expiry: March 2013
Options Contracts
Option contracts are standardized by strike price and expiration
John Q. Investor
Susan Speculator
10.20
Chapter 24: Options © Oltheten & Waspi 2012
Option Contracts
GE $30 March call quoted at $10.20 $10 in-the-money
GE $50 March put quoted at $12.30 $10 in-the money
Chapter 24: Options © Oltheten & Waspi 2012
Buys a call
Write a call
Call Option
John pays Susan $1,020
Susan must comply with John’s decision to buy or not to buy
Chapter 24: Options © Oltheten & Waspi 2012
-$5,000
-$3,000
-$1,000
$1,000
$3,000
$5,000
0 10 20 30 40 50 60 70 80
Option expires worthless
John Exercisesbuying 100 GE from Susan at $30
What is the breakeven price?
Buy Call
Chapter 24: Options © Oltheten & Waspi 2012
-$5,000
-$3,000
-$1,000
$1,000
$3,000
$5,000
0 10 20 30 40 50 60 70 80
Option expires worthlessSusan keeps the $1,020 premium
Option ExercisedSusan must sell 100 GE to John at $30
What is the breakeven price?
Write Call
Chapter 24: Options © Oltheten & Waspi 2012
Option Contracts
GE $30 March call quoted at $10.20 In the money by $10
GE $30 March put quoted at $0.40
GE $50 March call quoted at $0.15 GE $50 March put quoted at $12.30
In the money by $10
Chapter 24: Options © Oltheten & Waspi 2012
Buys a put
Write a put
Put Option
John pays Michael $1,230
Michael must comply with John’s decision to sell or not to sell
Chapter 24: Options © Oltheten & Waspi 2012-$5,000
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
0 10 20 30 40 50 60 70 80
Option expires worthless
John Exercisesselling 100 GE to Michael at $50
What is the breakeven price?
Buy Put
Chapter 24: Options
-$5,000
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
0 10 20 30 40 50 60 70 80
Option expires worthless
John Exercises:Michael must buy 100 GE from John at $50
Write Put
$1230 premium
Chapter 24: Options © Oltheten & Waspi 2012
Options
CALL PUT
BUY
Pays Premiumto the writer
Buys the rightto buy shares
Buys the rightto sell shares
WRITE
Receives the premiumfrom the buyer
Must sell shares if exercised
Must buy sharesif exercised
-$5,000
-$3,000
-$1,000
$1,000
$3,000
$5,000
0 10 20 30 40 50 60 70 80
-$5,000
-$3,000
-$1,000
$1,000
$3,000
$5,000
0 10 20 30 40 50 60 70 80
Buy Call
-$5,000
-$3,000
-$1,000
$1,000
$3,000
$5,000
0 10 20 30 40 50 60 70 80
Write Call
-$5,000
-$3,000
-$1,000
$1,000
$3,000
$5,000
0 10 20 30 40 50 60 70 80
Buy Put
Write Put
In the Money → |
In the Money → |
|←In the Money
|←In the Money
Options I
