1. Financial Derivatives
Greater Gains
Greater Risk

5. Financial Derivatives
Forward
Futures
Options
Swaps
These are the most common
Financial Derivatives

6. Stock Options Recall Options Owning a stock is owning growth
Owning a bond is owning debt
Options
Call Option  the right to buy at a specified price
Put Option  the right to sell at a specified price
A stock option is a privilege to buy or sell a stock at an agreed-upon price within a period of time
Stock Options

7. Call Option Investor buys a call option (Bullish trade)
Now owns the right to buy the ‘underlying asset’ at a specified price within a given time frame (maturity)
Investor sells a call option
‘Bearish’ trade
Assumes the obligation to supply the underlying asset
Call Option

8. Put Option Investor buys a put option (Bearish)
Investor now owns the right to sell a specified amount of an underlying security at a specified price within a time frame (maturity)
Put options are great for hedging when purchasing a security
Selling a put option is bullish
Put Option

10. Price Factors: Time Option contracts all have expiration dates
Just as most derivatives
Options have value until expiration
After that, they are worthless
Options with longer time until maturity will be more expensive
Price Factors: Time

11. Price Factors: Strike Price
Strike Price affects the premium (Intrinsic + Extrinsic [time value] because the strike price is the location of the value
Whether it contains intrinsic value, extrinsic value or both
Price Factors: Strike Price

12. ITM, OTM and ATM

13. A strike price that is below the current market price for a security is to be considered in the money
In the money trades mostly like a stock position
Relative to the difference between the strike price and underlying
ITM options require a smaller price move in the underlying in order to be profitable
The downside is that the percentage gain will not be as large
ITM options have the most intrinsic value
In the ‘Money’

14. The strike price of the option is equal to the underlying price
ATM option has the greatest uncertainty
Uncertainty is the risk associated
ATM can be the worst position if everything moves against you
Can also result in massive gains
ATM can hurt you the most if the underlying moves in the direction opposite of what you hoped
At The ‘Money’

15. OTM options require a large move in order to be profitable
A move large enough in the direction you want it too, the OTM option can deliver large gains
But if the move is against you, the loss will be less than ATM and ITM
OTM near expiration dates tends to fare well
Out of the ‘Money’

16. The actual value of a company or an asset based on an underlying perception of its’ true value including all aspects of business
Intrinsic Value

17. The difference between an option’s market price (current price) and its’ intrinsic value
It is also the portion of an item’s worth that is determined by external factors
Extrinsic Value is typically time value of an option
For example:
An option premium price of $10 with an intrinsic value of $9, the extrinsic value is $1
Extrinsic Value

18. Option Strategies Buy (Long) call Sell (Short) Call Buy Put Short Put
bullish
Sell (Short) Call
bearish
Buy Put
Short Put
If your option doesn’t obligate you to something, the risk is less
Shorting an option is riskier, but can pay out big
Option Strategies

22. Pattern
a combination of qualities, acts, tendencies, etc., forming a consistent or characteristic arrangement