A Basic Options Review. Options Right to Buy/Sell a specified asset at a known price on or before a specified date. Right to Buy/Sell a specified asset.

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Presentation transcript:

A Basic Options Review

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

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

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

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