Chapter 19 An Introduction to Options. Define the Following Terms n Call Option n Put Option n Intrinsic Value n Exercise (Strike) Price n Premium n Time.

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Presentation transcript:

Chapter 19 An Introduction to Options

Define the Following Terms n Call Option n Put Option n Intrinsic Value n Exercise (Strike) Price n Premium n Time Premium

Value of a Call Option n Premium = Intrinsic Value + Time Premium n Intrinsic Value of a Call n S - Ex if S > EX n or 0 if S <= EX n Time premium equals the premium (Market Price of the the option) less intrinsic value

What factors impact the value of a call option? n Time n Stock Price n Exercise Price n Interest Rates n Volatility

Profits & losses for the buyer of a call option n o X

Profits & losses for the seller of a call option o X

Long Call vs Long Stock n o x

Value of a Put Option n Premium = Intrinsic Value + Time Premium n Intrinsic Value of a Put n 0 if S > EX n or Ex - S if S <= EX n Time premium equals the premium (Market Price of the the option) less intrinsic value

What factors impact the value of a put option? n Time n Stock Price n Exercise Price n Interest Rates n Volatility

Profits & losses for the buyer of a put option n o X

Profits & losses for the seller of a put option o X

Terminology n Call Option – The buyer of a call option has the right to buy the underlying asset at a specified price within a specified time period. – The writer of a call option has the obligation to sell the underlying asset as a specified price within a specified period.

Terminology n Put Option – The buyer of a put option has the right to sell the underlying asset at a specified price within a specified time period. – The writer of a put option has the obligation to buy the underlying asset at a specified price within a specified time period.

Protective put option n o X Long Put Long Stock

Protective Put Option Net Payoff n o X Net Payoff

Definitions n Stock index options n Leaps n Warrants

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