AIM How can we use derivative investments to enhance our portfolio? DO NOW What are stock options? OPTIONS AND FUTURES.

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Presentation transcript:

AIM How can we use derivative investments to enhance our portfolio? DO NOW What are stock options? OPTIONS AND FUTURES

 RIGHT to buy or sell something at a specified price by a specified time  The option itself has a value based on the price of the underlying asset (intrinsic value)  The value (or price) of the option will fluctuate based on the rise and fall of the underlying asset STOCK OPTIONS

 What you pay for an option to BUY an X-Box One with Kinect in 6 months for $450.00? (current average price is $500)?  What do you think the price will be in 6 months?  What is the difference between that price and your option price?  How much is the option worth to you?  What about the same option in 12 months?  What you pay for an option to SELL an X-Box One with connect in 12 months for $350.00? (current average price is $500)? HOW MUCH WOULD YOU PAY?

 A stock option is the right to buy or sell a stock  Call options are the right to BUY a stock at a specified price (strike price) by some date in the future  Put options are the right to SELL a stock at a specified price (strike price) by some date in the future STOCK OPTIONS

“In the money” means your strike price is better than the stock price. “Out of the money” is the opposite.  If you buy a CALL option with a strike price of $45 and on the EXPIRATION date, the stock price is $48, did you finish in or out of the money? By how much?  If you buy a CALL option with a strike price of $45 and on the EXPIRATION date, the stock price is $40, did you finish in or out of the money? By how much?  If you buy a PUT option with a strike price of $45 and on the EXPIRATION date, the stock price is $40, did you finish in or out of the money? By how much? IN OR OUT OF THE MONEY?

Speculation - “Betting “ Can buy into a stock for less money than actually buying the stock. Small price movements can have big effects on options. For this reason, options are considered to be risky investments, with potential high returns. Hedging – “Insurance Policy” Stock options can be used to considerably reduce risk. Put options can cover your purchases of stocks, in case they drop in price. WHY TRADE OPTIONS?

 Options can get complex – you can even short options!  Advanced strategies can be used to hedge other investments, make money on the upside and downside or even if the stock holds steady: nced_concepts/strategies.html OPTIONS

What are futures?  An agreement to buy something that a seller has not yet produced for a set price. Mostly commodities like corn, pork, dairy, oranges, gold, silver, etc.  Used to hedge risk or speculate rather than to exchange physical goods. explained/ FUTURES CONTRACTS

 What is the meaning of derivative?  Why are options and futures considered derivative investments? DERIVATIVE

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