1. OPTIONS

2. Content 2 I. Introduction 1. What is an Option?2. Option Terminology 3. Option Type4. Premium II. Option Strategies(Naked Positions) 1. Call Option2. Put Option 3. Important Option Rule4. Terminologies 5. Example III. Option 의 거래기법 1. Spread Trade2. 변동성 거래 IV. Option Prcing

3. I. INTRODUCTION

4. 4  Simply stated, an option is ________.  The buyer of an option acquires the __________or sell an underlying commodity but _________________.  Only the seller of the option is ___________ to perform. 1. What is an Option?

5. 5  100 acres of cropland  $1,200/acre  You would like to own the land but you may be unable to buy it at the present time.  Deposit some money and make a contract to either buy or give up the land during the next 6 mths. You have an option _____________________.  You have an option _____________________.  If you subsequently buy the land, the seller is obligated to sell it at that price. 1. What is an Option?

6. 6  But the option does not obligate you.  If you do not want to purchase the land, you can simply let the option expire (  give it up).  Or better yet, if the option rights are transferable, you may be able to sell them to someone else. 1. What is an Option?

7. 7 Buyer  The purchaser of an option  The option holder  Has the right to exercise the option. 2. Option Terminology Seller  Sells an option  The Writer  Receives the money the option buyer pays  Obligated to deliver when the option is expired.

8. 8  Call Option  Right to buy a futures contract at a specified price.  If the buyer exercises the call option, he will acquire _______futures position, and at the same time, a short futures position will be assigned to someone who has sold an option.  Exercise  The action taken by the buyer of an option who wants to convert option into futures position at the option ____________. 2. Option Terminology

9. 9  Put Option  Right to sell a futures contract at a specified price.  If the buyer exercises the put option, he will acquire ______ futures position, and at the same time, a long futures position will be assigned to someone who has sold an option.  Underlying Contract  the specific futures contract, such as the November soybean futures contract (or IBM stock) 2. Option Terminology

10. 10  Premium  The __________________.  The money the option buyer pay and the option seller receives for the right.  The premium represents the maximum amount the option buyer can lose.  It is the only term of the option contract negotiated in the trading pit; all other contract terms are predetermined. 2. Option Terminology

11. 11  Exercise (Strike) Price  The price at which the buyer of a call has the right to purchase a futures contract and at which the buyer of a put has the right to sell a futures contract.  The strike price is predetermined and specified in the options contract. 2. Option Terminology

12. 12  Example Wheat May 380 call/put 2. Option Terminology

13. 13

14. 14  Types of Expiration  European Style Exercise only at the expiration date  American Style Exercise at any time.  Capped Exercise automatically if price heats the cap. 3. Option Type

15. 15  Premium = Intrinsic value + Time Value  Intrinsic Value: Payoff when you exercise ________________________  Time value the sum of money that buyers are currently willing to pay for a given option in the anticipation that a change in the underlying futures price over time will cause the option to increase in value. 4. Premium

16. 16 4. Premium

17. 17 Put FP EP ATMITMOTM Intrinsic Value Time value 만기 이전 옵션가치 ( 가격 ) 옵션의 만기 때 가치 ( 가격 ) 4. Premium

18. 18  Time Value Call option on corn futures: Exercise Price = $2.38 Futures Price = $2.50 Premium = $0.20 Intrinsic Value = ______________________ Premium = $0.20 = Intrinsic value ($0.12)+ Time Value  Time value = ________ 4. Premium

19. 19  In the money  Intrinsic Value > 0  At-the-money  Strike Price = Underlying Futures Price  Out-of-the-money  Zero Intrinsic Value 4. Premium

20. Strike Price CallPut DecMarMayDec.MarchMay 2.3020 1/2 30-1/41/23/4 2.4011 1/2 22281 1/8 1 3/4 2.504 1/2 14 1/4 214 1/4 4 1/2 4 3/4 2.601 1/2 9 1/4 1511 1/4 8 1/4 7 1/2 2.705/85 3/4 102013 1/2 12 1/2 2.801/43 1/2 729 1/2 2017 20 4. Premium

21. 21  Futures price will rise tomorrow  Call Premium = ____________  Put Premium = _____________  Futures price will decline tomorrow  Call Premium = ____________  Put Premium = ____________ 4. Premium

22. Option Matrix CallPutCharacteristic Buy Right to buy futures Bullish Right to sell futures Bearish Cash Outflow, Limited Risk, and Pay time decay (Most you can lose is your premium) Sell Obligation to sell futures Bearish Obligation to buy futures Bullish Cash inflow, Unlimited Risk and Earn time decay (Collect premium) ITMFP > SPFP < SP ATMFP = SP OTMFP < SPFP > SP

23. 선도 계약옵션계약 거래내용 한달 후 1000 원에 매매 한달 후 1000 원에 구매할 권리 거래에 대한 대가 없음 50 원 지급 가격 (exercise price) 이 1000 원에서 1100 원으로 상승 구매자 100 원 이익 판매자 100 원 손해 구매자는 100 원 싸게 구입하나 premium 50 지출 => 50 원 이익 판매자는 100 원 싸게 판매하나 premium 50 수입 => 50 원 손해 가격이 900 원으로 하락 구매자 100 원 손해 판매자 100 원 이익 구매자는 계약 포기 => 50 원 손해 판매자는 premium 50 원 수입 ( 가격하락해서 손해 본 것은 이 계약과 별도 ) 23

24. II. OPTION STRATEGIES (NAKED POSITION)

25. 25  When prices are given as  Dec. Corn futures = $2.50  Exercise Price = $2.50  Premium = $0.20  Buy a call  If futures price went up to $2.80, you could ________  If futures price went down to $2.20, option is _____________ 1. Call Option

26. 26 Profit Exercise Price Futures Price $2.50 1-1. Long Futures

27. 27 1-2. Buy a Call

28. 28 1-3. Sell a Call (Writer of a Call)

29. 29  When prices are given as  Dec. Corn futures = $2.50  Exercise Price = $2.50  Premium = $0.20  Buy a put  If futures price went up to $2.80, option is ________.  If futures price went down to $2.20, you could ____________. 2. Put Option

30. 30 $ Exercise Price Futures Price $2.50 2-1. Short Futures

31. 31 2-2. Buy a Put

32. 32 2-3. Sell a Put (Writer of a Put)

33. 33 $ Buying a put option is like buying a insurance 2-4. Buy a Put and Insurance

34. 34  Hedging  eliminating the risk of loss by giving up the potential for gain  Insurance  paying a premium to eliminate the risk of loss and retain the potential for gain 2-5. Hedging VS. Insurance (Put Option)

35. 35  Planning a trip from Seoul to Chicago a year from now. Wish to make a reservation now.  Airline reservation clerk tells that  you can either lock in a price of $1,000 now or  you can pay whatever the price turns out to be on the day of your flight.  If you decide to lock in the $1,000 price,  you have Hedged against risk of loss  It costs you nothing to do so,  but you have given up the possibility of paying less than $1,000 for your flight a year from now 2-5. Hedging VS. Insurance (Put Option)

36. 36  Alternatively, the airline may offer you the possibility of paying $20 now for the right to purchase your ticket a year from now at a price of $1,000.  By buying this right, you have insured that you will pay no more than $1,000.  If the price > $1,000, exercise the right, otherwise let it expire  By paying $20, purchased insurance against the risk that you will have to pay more than $1,000 but retained the opportunity to buy the ticket for less than $1,000. 2-5. Hedging VS. Insurance (Put Option)

37. 37  Margin Requirement: 1. No margin is allowed for buying options 2. For writing a naked option, the investor must deposit 100% option premium plus at least 20% of the underlying security price minus the amount the call is out-of-money, with the minimum of 10% of futures or stock prices 3. Important Option Rules

38. 38  Position Limits  the maximum # of options an investor can hold on one side of market.  Exercise Limits  the maximum # of options that can be exercised on any five consecutive business days 3. Important Option Rules

39. 구분옵션거래선물거래 권리와 의무매입자 = 권리 매도자 = 의무 매입자와 매도자 모두 권리 및 의무를 가짐 거래의 대가매입자가 매도자에게 권리에 대한 대가 지급 (option premium) 계약대가를 지불할 필요 없음 ( 계약 당시 기대이익이 서로 같아 계약가치가 0) 리스크매입자 : 프리미엄으로 제한 매도자 : 무제한이되 프리미엄 만큼 줄어듦 매입자, 매도자가 모두 무한대 위탁증거금매입자는 없고 매도자에게만 매입자, 매도자 모두 부과 일일정산매입자는 필요 없고 매도자만 매입 - 매도자 모두 39

40. 40  Delta (  ):  Changes in the option price as the underlying futures price changes.  First derivative of the option price with respect to futures price (  option/  futures ).  ATM:  = 0.5  Deep OTM:   0 (No matter where futures price is, no one wants to trade)  Deep ITM:   1 4. Terminologies

41. 41  Delta Hedging   = 0.6 When the futures price changes by small amount, the option price changes by about 60% of that amount. 4. Terminologies

42. 42  Gamma (  ):  2nd derivative of the option price  The rate of change in delta as futures price changes  If the  is small, delta changes slowly.  If the  is large in absolute term, delta is highly sensitive to the futures price changes. 4. Terminologies

43. 43  Theta (  ):  related to time value  How premium changes as time to expiration changes. 4. Terminologies

44. FPTarget Price HedgeBuy a Put Write a Call $5.00 $6.00 $7.00 Target Price EP = $6.00 Premium = $0.50 Exp.Basis = -$0.40 5-1. Short Hedge: Soybean Producers and/or Grain Elevators

45. FPHedgeBuy a CallWrite a Put $5.00 $6.00 $7.00 45 Target Price EP = $6.00 Premium = $0.50 Exp.Basis = -$0.40 5-2. Long Hedge: Soybean Processors

46. III. OPTION 의 거래기법

47. 47 1. Spread Trade MarAprMayJuneSep 790 780 770 760 750 Vertical Spread Diagonal Spread Horizontal Spread

48.  bull spread;  대상물 가격상승시 이익, 하락시 손실,  bear spread  대상물 가격하락시 이익, 상승시 손실  Bull call spread  콜옵션 합성을 이용한 강세 스프레드 합성  대상물 가격상승예상 =>  낮은 행사가격 (X1) 의 콜옵션을 매입하고  높은 행사가격 (X2) 의 콜옵션 매도 1-1. Vertical Spread Trading

49. Bull call spread Buy a call for low strike price Sell a call for high strike price Price Payoff 가격상승예상 2 different strike prices

50. Buy a put for low strike price (X1) Sell a put for high strike price (X2) X1X2 Bull put spread 가격상승예상

51. Sell a call of low strike price (x1) Buy a call of high strike price (x2) X1X2 Bear call spread 가격하락예상

52. Buy a put of high strike price (X1) Sell a put of low strike price (X2) X1 X2 Bear put spread 가격하락예상

53. 강세 콜 - 풋 옵션 합성손익 약세 콜 - 풋 옵션 합성손익 약세 => 가격 하락 예상 강세 => 가격상승 예상

54.  행사가격은 같고 만기일이 서로 다른 두 옵션 을 매입, 매도  만기일이 가까운 옵션일 수록 시간가치 감소분 이 더 큰 특징이용 ;  안전하나 기대수익이 크지 않음 1-2. Horizontal Spread Trading

55. Price Payoff 콜매도 ( 만기일에 가까움, why?) 콜매입 ( 만기일에서 멈, why?)

56.  행사가격과 만기일이 서로 다른 두옵션을 매입, 매도 ;  수직 - 수평 스프레드의 성격이 혼합 ;  수직스프레드 ( 시간가치와 관계 없음 ),  수평스프레드 ( 가격변화와 관계없음 ) 1-3. Diagonal Spread Trading

58.  옵션의 장점 : 손실폭 제한, 손익구조 합성 + 변동성 매매 가능  변동성이 증가예상 => 변동성 매입  변동성 감소 예상 => 변동성 매도  현물 - 선물은 시세차익을 얻는 수준거래 (level trading), 옵션은 변동성거래 (volatility trading) 이 가능 2. 변동성 거래

59.  경제지표 발표, 시장 사건 (event) 으로 시장 이 큰 폭으로 움직일 것이 예상되나 방향이 불확실한 경우, 현물 - 선물은 거래가 어려움, 옵션은 방향과 관계없이 변동성이 커지는 것 만으로도 이익 창출이 가능  스트래들 (straddle; 양다리 걸치다 ),  스트랭글 (strangle; 꽉쥐다 ),  버터플라이 (butterfly) 2. 변동성 거래 (Example)

60.  매입 스트래들 :  동일한 계약조건을 가진 콜옵션과 풋옵션을 동시에 매입 ;  변동성이 클 것으로 예상  변동성을 산다 (long volatility) 2-1. Straddle Trading

61. X1 X2X3 풋옵션 매입 콜옵션 매입 변동성이 크면 이익 변동성이 크면 이익 매입 스트래들 * 한개의 행사가격 => 두개구간

62.  매도 스트래들 :  동일한 계약조건을 가진 콜옵션과 풋옵션을 동시에 매도 ;  변동성이 작을 것으로 예상  변동성을 판다 (short volatility) 2-1. Straddle Trading

63. X1 X2 X3 풋옵션 매도 콜옵션 매도 변동성이 작으면 이익 매도 스트래들

64.  스트래들 ( 매입 )  프리미엄 지출 상대적으로 큼  스트랭글  프리미엄 비용을 줄이기 위하여 외가격 콜옵션과 외가격 풋옵션을 구입하는 것  둘 다 외가격이므로 프리미엄이 적음 2-2. Strangle Trading

65. X1 풋옵션 매입 콜옵션 매입 매입 Strangle X3 X2 X4

66.  매도스트래들 거래시 예상이 빗나가 변동성이 커지면 큰손실  버터플라이는 변동성 파는 전략을 구사할때 손실폭을 일정한도로 구사  동일한 콜옵션 중 행사가격이 다른 세종류의 콜옵션 이 용  가장 높고, 가장 낮은 행사가격을 가진 콜옵션은 매입, 중간크기의 행사가격을 가진 콜옵션 두개 매도 ; 1:2:1 로 매입과 매도 포지션  풋옵션의 경우 : 낮은 - 높은 가격 매입, 중간가격 매도 2-3. Butterfly Trading

67. * 세개의 행사가격 => 네개구간 ; 가격 손익 콜옵션 2 개 매도 X=50 콜옵션 매입 X=52 콜옵션 매입 X=48

68. 가격 손익 콜옵션 매입 X4 콜옵션 매입 X1 콜옵션 매도 X2 콜옵션 매도 X3 버터플라이에서는 동일 콜옵션매도, 콘돌에서는 다른 콜옵션매도 2-3 Butterfly Trading (condor)

69. IV. OPTION PRICING MODEL

70. 70 Option Pricing Models Binomial Option Pricing Model Black-Scholes Option Pricing Model

71.  Provides a generalisable numerical method for the valuation of options.  First proposed by Cox, Ross and Rubinstein (1979).  Uses a "discrete-time" model of the varying price over time of the underlying financial instrument.  Assume the risk neutrality over the life of the option as opposed a particular time. 1. Binomial Option Pricing Models

72.  A mathematical model of the market for an equity, in which the equity's price is a stochastic process.  For European put and call options.  The formula was derived by Fisher Black and Myron Scholes (1973)  The fundamental insight of Black and Scholes is that the option is implicitly priced if the stock is traded.  Merton and Scholes received the 1997 Nobel Prize in Econ.; Black was ineligible, having died in 1995. 2. Black-Scholes Pricing Models

74.  Binomial Option Pricing Model  American Option Pricing  Assume the stock price follows binomial distribution  Two-state model  Black-Scholes Option Pricing Model  European Option Pricing  Assume the stock price follows a geometric Brownian motion 3. Comparison