Lecture 15

 Option - Gives the holder the right to buy or sell a security at a specified price during a specified period of time.  Call Option - The right to buy a security at a specified price within a specified time.  Put Option - The right to sell a security at a specified price within a specified time.  Option Premium - The price paid for the option, above the price of the underlying security.  Intrinsic Value - Diff between the strike price and the stock price  Time Premium - Value of option above the intrinsic value  Exercise Price - (Striking Price) The price at which you buy or sell the security.  Expiration Date - The last date on which the option can be exercised.

Option ends by… 1. Expiration 2. Exercise 3. Sales  American option  European option  Intrinsic Value = P – E  Time Premium = O + E – P  Moneyness ◦ In the money ◦ Out of the money ◦ At the money

Asset Price Profit Loss Option Review

 Market Makers  Round Trip  Lot size is 100 shares  Naked positions  Covered positions CBOE Quotes (web)  Open interest  Volume  Bid-ask  Prices

Option Value Price (expiration) Time (days)

Example – Given an exercise price of $55, what are the likely call option premiums, given stock prices of 50, 56, and 60 dollars?

 Intrinsic Value & Time Premium graphed Option Price Stock Price Days to Expiration

 Swaptions  Index options  Futures options  Currency options  Convertible bond  Warrant

 Knock out options ◦ Down and out ◦ Up and out  Knock in options ◦ Down and in ◦ Up and in

 Executive Stock Options ◦ “To Expense or Not to Expense”