CHAPTER 10 OPTIONS

DIFFERENCES BTW OPTIONS AND FUTURES, – AN OPTION CONTRACT PERMITS THE BUYER TO CHOOSE WHETHER OR NOT EXERCISE THE OPTION. IN FUTURES CONTRACT BOTH BUYER AND SELLER TAKE OBLIGATIONS. – BUYER OF AN OPTION CONTRACT PAYS PREMIUM. IN A FUTURE CONTRACT NEITHER PARTY PAYS PREMIUM.

OPTIONS OPTION WRITER= SELLER OF AN OPTIONS CONTRACT. OPTION HOLDER= BUYER CONTRACTS TYPES; – CALL OPTION – PUT OPTION

OPTIONS OPTION WRITER (SELLER) HAS 3 ALTERNATIVES; – CLOSING UP THE POSITION. – IF THE OPTION BUYER WANTS TO EXERCISE, OPTION WRITER HAS TO OBEY. – IF THE BUYER DO NOT WANT TO EXERCISE, PREMIUM WILL BE HIS GAIN.

OPTIONS OPTION HOLDER (BUYER) HAS 3 ALTERNATIVES; – HE CAN SELL THE OPTION THAT HE BUYS, – CAN EXERCISE, – WILL NOT EXERCISE, WAIT UNTIL THE EXPIRATION DATE, THE PREMIUM WILL BE HIS LOSS.

OPTIONS CALL OPTION: PROVIDES THE OPTION BUYER THE RIGHT TO PURCHASE THE UNDERLYING SECURITIES AT PREDETERMINED PRICE. PUT OPTION: TO SELL THE UNDERLYING SECURITIES AT PREDETERMINED PRICE.

OPTIONS STRIKE (EXERCISE) PRICE:IT IS THE PRICE AT WHICH THE HOLDER CAN SELL TO OR BUY FROM THE WRITER THE ITEM THAT UNDERLIES THE OPTION. EXPIRATION DATE: IT IS THE LAST DATE ON WHICH THE HOLDER CAN EXERCISE AN OPTION. PREMIUM: IS THE PRICE THAT BUYER OF AN OPTION PAYS AND THE WRITER OF AN OPTION RECEIVES.

OPTIONS TYPES OF OPTIONS; – An America-style option can be exercised by the holder at any time after it is purchased until it expires. – A European-style option may be exercised only on the expiration date. Most exchange-traded stock options (including Turkey’s) are American-style.

OPTIONS OUT OF MONEY OPTION; – A CALL OPTION IS OUT OF MONEY WHEN EXERCISE PRICE > MARKET PRICE – A PUT OPTION IS OUT OF MONEY WHEN EXERCISE PRICE < MARKET PRICE.

OPTIONS IN THE MONEY OPTION: – A CALL OPTION IS IN THE MONEY WHEN STRIKE PRICE < MARKET PRICE. – A PUT OPTION IS IN THE MONEY WHEN STRIKE PRICE > MARKET PRICE AT THE MONEY: – MARKET PRICE = STRIKE PRICE

OPTIONS: STOCK OPTIONS A STOCK OPTION IS A CONTRACT THAT GIVES ITS HOLDER THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR SELL SHARES OF THE UNDERLYING SECURITY AT A SPECIFIED PRICE, ON OR BEFORE A GIVEN DATE. OPTIONS HAVE STANDARDIZED TERMS, INCLUDING THE EXERCISE (STRIKE) PRICE AND EXPIRATION TIME.

OPTIONS THE CBOE IS THE WORLD’S LARGEST OPTION EXCHANGE. OPTIONS ARE ALSO TRADED ON; – THE AMERICAN STOCK EXCHANGE (AMEX) – THE PACIFIC EXCHANGE (PCX) – THE PHILADELPHIA STOCK EXCHANGE (PHLX)

OPTIONS OPTIONS ARE NOT LIMITED TO COMMON STOCK. THEY ARE WRITTEN ON; – BONDS – CURRENCIES – FOREIGN EXCHANGE – SPECIFIC INDUSTRIES INDEXES

OPTIONS: INDEX OPTIONS UNLIKE STOCK OPTIONS, WHERE A STOCK CAN BE DELIVERED IF THE OPTION IS EXERCISED, FOR INDEX OPTIONS, THERE IS NO DELIVERY OF ANY STOCK. THEY ARE CASH SETTLEMENT CONTRACTS.

OPTIONS: CURRENCY OPTIONS A CURRENCY OPTION GIVES THE BUYER THE RIGHT TO BUY OR SELL A FIXED QUANTITY OF A SPECIFIED CURRENCY IN EXCHANGE FOR A SPECIFIC QUANTITY OF ANOTHER CURRENCY, IN A RATIO DETERMINED BY THE STRIKE PRICE OF THE OPTION.

OPTIONS ON INTEREST RATE OPTIONS ON INTEREST RATE EXIST FOR BOTH LONG-TERM AND SHORT-TERM FINANCIAL INSTRUMENTS. AMONG THEM U.S. TREASURY NOTES AND BONDS ARE THE MOST POPULAR OPTION CONTRACTS.