Options Markets: Introduction Faculty of Economics & Business The University of Sydney Shino Takayama

Option Terminology Buy - Long Sell - Short Call Put Key Elements Exercise or Strike Price Premium or Price Maturity or Expiration

American vs European American - the option can be exercised at any time before expiration or maturity. European - the option can only be exercised on the expiration or maturity date.

Profit and Payoff for Call Notation Stock Price = S T Exercise Price = X Payoff to Call Holder ( S T - X) if S T >X 0if S T < X Profit to Call Holder Payoff - Purchase Price

Profit and Payoff for Call Payoff to Call Writer - ( S T - X) if S T >X 0if S T < X Profit to Call Writer Payoff + Premium

Payoffs and Profits for puts Payoffs to Put Holder 0if S T > X (X - S T ) if S T < X Profit to Put Holder Payoff - Premium

Payoffs and Profits for puts Payoffs to Put Writer 0if S T > X -(X - S T )if S T < X Profits to Put Writer Payoff + Premium

Protective Puts Use - limit loss Position - long the stock and long the put PayoffS T X Stock S T S T Put X - S T 0

Covered Call Use - Some downside protection at the expense of giving up gain potential. Position - Own the stock and write a call. PayoffS T X Stock S T S T Call 0 - ( S T - X)

Other Option Strategies Straddle (Same Exercise Price) Long Call and Long Put Spreads - A combination of two or more call options or put options on the same asset with differing exercise prices or times to expiration.