Derivatives Quiz

call option

gives the holder the right to buy underlying asset by certain date for certain price

put option

gives holder the right to sell underlying asset by certain date for certain price

strike price or exercise price

the certain price in that contract

option premium

the price that the buyer pays for a call or put option

american options

can be exercised anytime up to expiry date

european options

can only be exercised on the option expiration date itself

option buyer

long position

option seller

short position or option writer

options on stocks usually controls ___ shares per contract, but quoted per share

100

example: a call option on stock xyz, strike price is $50, expiry is Nov 19th, quoted price is $2.30

total cost would be 100 × 2.30 = $230

long call

wants the stock price to go up

short call

wants the stock price to stay below strike price

long put

wants the stock price to go down

short put

wants stock price to stay above strike price

S0

current stock price

K

strike price of option

T

time to expiration of option

ST

stock price on the expiration date

r

risk-free interest rate (continuous compounding) for investment maturing in time T

D

present value of all dividends during option life

σ

volatility of stock price

C

american call option price

P

american put option price

c

european call option price

p

european put option price

call: S > K

call: in the money

call: S = K

call: at the money

call: S < K

call: out the money

put: S < K

put: in the money

put: S = K

put: at the money

put: S > K

put: out the money

put-call parity

the relationship between the price of a european call option and european put option that have the same strike price and expiry