Options An option is a financial contract in which one party (the buyer) MAY buy (for a Call option) or sell (for a Put option) a specified quantity of.

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Presentation transcript:

Options An option is a financial contract in which one party (the buyer) MAY buy (for a Call option) or sell (for a Put option) a specified quantity of an asset at or before a specified date, for a fixed exercise or strike price. The buyer pays an option price, or premium, upfront in exchange for the right to exercise this option. An option is a financial contract in which one party (the buyer) MAY buy (for a Call option) or sell (for a Put option) a specified quantity of an asset at or before a specified date, for a fixed exercise or strike price. The buyer pays an option price, or premium, upfront in exchange for the right to exercise this option. The counterparty (the seller, or writer of the option) MUST sell (for a call option) or buy (for a put option) the specified asset at the exercise price if and when the buyer exercises his right. In exchange, the writer receives the premium from the buyer upfront. The counterparty (the seller, or writer of the option) MUST sell (for a call option) or buy (for a put option) the specified asset at the exercise price if and when the buyer exercises his right. In exchange, the writer receives the premium from the buyer upfront.

A “Call” Caps the Cost of Refinery Feedstock

A “Put” Supports a Producer’s Sales Revenue

Hedgers Buy Options, Never Sell Options

Calls or Forwards? The call offers protection and profit – the airline get protection from high fuel price – but reaps the benefit of low fuel price The futures contract offers only protection – no downside risk – no upside profit The call sells for a premium price!

“Costless Collar” Provides Both Floor & Ceiling

Constructing the Costless Collar

Current Market Pricing of Collars

Option Value and “Delta”

Delta is Most Sensitive to Spot Price In Vicinity of Strike Price

Theta is the slope, decline in value as time expires

Estimating the “Greeks” From the Binomial Tree