VIII: Options 24: Options. Chapter 24: Options Computers Unlimited Windows Surface 14” Display 64GB White cover Office 2010 $1,999 Good Til.

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Presentation transcript:

VIII: Options 24: Options

Chapter 24: Options Computers Unlimited Windows Surface 14” Display 64GB White cover Office 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 © Oltheten & Waspi 2012 Call Option

Chapter 24: Options © Oltheten & Waspi 2012 Intrinsic Value  The Intrinsic Value of the coupon is $ $1999 = - $200  Out-of-the-money  We throw the coupon away (the option expires worthless) Computers Unlimited $1, $1,

Chapter 24: Options © Oltheten & Waspi 2012 Intrinsic Value  The Intrinsic Value of the coupon is $ $1999 = $0  At-the-money  We throw the coupon away (the option expires worthless) Computers Unlimited $1,

Chapter 24: Options © Oltheten & Waspi 2012 Intrinsic Value  The Intrinsic Value of the coupon is $ $1999 = $200  In-the-money  We use the coupon to purchase at $1999. (exercise option) Computers Unlimited $2, $1,

Chapter 24: Options © Oltheten & Waspi 2012 Option expires worthless Exercise Option Payout: Value & Profit What is the breakeven price? P

Chapter 24: Options Options & Futures Buy Futures Sell Futures Buy Soybeans Sell Soybeans Must buy Must sell © Oltheten & Waspi 2012

Chapter 24: Options 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 © Oltheten & Waspi 2012

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 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 © Oltheten & Waspi 2012

Chapter 24: Options Option expires worthless John Exercises buying 100 GE from Susan at $30 What is the breakeven price? Buy Call © Oltheten & Waspi 2012

Chapter 24: Options © Oltheten & Waspi 2012 Option expires worthless Susan keeps the $1,020 premium Option Exercised Susan 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 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 © Oltheten & Waspi 2012

Chapter 24: Options Option expires worthless John Exercises selling 100 GE to Michael at $50 What is the breakeven price? Buy Put © Oltheten & Waspi 2012

Chapter 24: Options Option expires worthless John Exercises: Michael must buy 100 GE from John at $50 Write Put $1230 premium

Chapter 24: Options Options © Oltheten & Waspi 2012 CALLPUT BUY Pays Premium to the writer Buys the right to buy shares Buys the right to sell shares WRITE Receives the premium from the buyer Must sell shares if exercised Must buy shares if exercised

Buy Call Write Call Buy Put Write Put In the Money → | |←In the Money

Options I