FMI Lec9 Options

Option

a contract that gives right to call or put at strike price

Call option

right to buy— call to you

Put option

Right to sell— Put out

Buying indicates a ____ position

long

Selling indicates a ____ position

short

Payoff

how much option returns at expiration, ignoring the premium

Profit

Payoff - premium

4 determinants of option price

1. strike price

2. spot price @ expiration

3. volatility of underlying asset

4. time to expiration

What impact does a high strike price have on a call option’s price and why?

high strike price = low call price

less likely to be profitable. price of underlying asset must make a larger move to exceed the strike buying price

What impact does a high strike price have on a put option’s price?

It raises it; you want the strike to be higher than the market for a put, and a higher strike makes this more likely.

What does a high spot price do to call price

it increases it

more likely that strike will be less than market

What does a high spot price do to put price

lower it

with a put, you want market to fall so the X is higher. This becomes less likely when spots are high.

Impact of velocity and time to exp on both call and put options

raises both

more volatility and more time to exp = greater opportunity for good outcome to be realized