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Understanding Options Principles of Corporate Finance Seventh Edition Richard A. Brealey Stewart C. Myers Slides by Matthew Will Chapter 20 McGraw Hill/Irwin.

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Presentation on theme: "Understanding Options Principles of Corporate Finance Seventh Edition Richard A. Brealey Stewart C. Myers Slides by Matthew Will Chapter 20 McGraw Hill/Irwin."— Presentation transcript:

1 Understanding Options Principles of Corporate Finance Seventh Edition Richard A. Brealey Stewart C. Myers Slides by Matthew Will Chapter 20 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved

2 20- 2 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Topics Covered  Calls, Puts and Shares  Financial Alchemy with Options  What Determines Option Value  Option Valuation

3 20- 3 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Terminology Put Option Right to sell an asset at a specified exercise price on or before the exercise date. Call Option Right to buy an asset at a specified exercise price on or before the exercise date.

4 20- 4 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Obligations

5 20- 5 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value  The value of an option at expiration is a function of the stock price and the exercise price.

6 20- 6 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value  The value of an option at expiration is a function of the stock price and the exercise price. Example - Option values given a exercise price of $55

7 20- 7 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Call option value (graphic) given a $55 exercise price. Share Price Call option value $20

8 20- 8 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Put option value (graphic) given a $55 exercise price. Share Price Put option value $5

9 20- 9 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Call option payoff (to seller) given a $55 exercise price. Share Price Call option $ payoff 55

10 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Put option payoff (to seller) given a $55 exercise price. Share Price Put option $ payoff 55

11 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Protective Put - Long stock and long put Share Price Position Value Long Stock

12 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Protective Put - Long stock and long put Share Price Position Value Long Put

13 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Protective Put - Long stock and long put Share Price Position Value Protective Put Long Put Long Stock

14 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Protective Put - Long stock and long put Share Price Position Value Protective Put

15 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Share Price Position Value Long call

16 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Share Price Position Value Long put

17 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Share Price Position Value Straddle

18 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Share Price Position Value Straddle

19 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Upper Limit Stock Price

20 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Option Value Upper Limit Stock Price Lower Limit (Stock price - exercise price) or 0 which ever is higher

21 McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved Time Decay Chart Option Price Stock Price


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