Understand the basics of options, puts, and calls.
Describe the options market, including strike prices and expiration dates.
Explain option valuation and the factors influencing option prices.
Financial Assets: Claims on an issuing organization (e.g., stocks, bonds).
Option: Right to buy/sell an underlying asset at a fixed price for a limited time (e.g., calls, puts).
Call: Right to buy stock at the strike price.
Put: Right to sell stock at the strike price.
Derivative Securities: Options (and futures) derive value from the underlying asset.
Option holders have no voting rights or ownership privileges.
Option Premium: Price paid to buy an option.
Options provide leverage, allowing investors to benefit from price movements with less capital.
Options are created by investors, not the underlying asset issuers.
Option Seller (Writer):
Receives premium upfront.
Obligated to sell (call) or buy (put) the asset.
Option Buyer:
Right to buy (call) or sell (put) at the strike price for a period.
Pays the option premium.
Can choose not to exercise the option.
Options trade in the open market.
Call:
Buyer wants the underlying asset price to increase.
Seller wants the underlying asset price to decrease.
Put:
Buyer wants the underlying asset price to decrease.
Seller wants the underlying asset price to increase.
Advantages:
Leverage: potential for large profits from small price movements.
Profit from rising or falling prices.
Disadvantages:
No interest or dividend income, no ownership benefits.
Options expire, limiting the time to profit.
Risky: price changes can render options worthless.
Expiration Date: Date option expires.
American Options: Exercisable any time up to expiration.
European Options: Exercisable only on the expiration date.
U.S. exchange-listed options are American options.
Option value depends on the underlying asset's price.
Other factors: time to expiration, stock volatility, interest rates.
Price potential on a call is unlimited. Price potential on a put is limited because stock price can't go below 0$$0$$.
Determined by the relationship between strike price and market price.
In-the-Money:
Call: strike price < market price.
Put: strike price > market price.
Intrinsic value is greater than zero.
Out-of-the-Money:
Call: strike price > market price.
Put: strike price < market price.
At-the-Money: strike price = market price.
Put and call options with the same asset, strike price, and expiration date cannot move independently.
Put-Call Parity: Portfolios with a put and stock share payoffs with a portfolio containing a call and risk-free bond.
Knowing the underlying stock price, risk-free rate, and call option price allows determining the put value.
week 28 Options: Puts and Calls
Understand the basics of options, puts, and calls.
Describe the options market, including strike prices and expiration dates.
Explain option valuation and the factors influencing option prices.
Financial Assets: Claims on an issuing organization (e.g., stocks, bonds).
Option: Right to buy/sell an underlying asset at a fixed price for a limited time (e.g., calls, puts).
Call: Right to buy stock at the strike price.
Put: Right to sell stock at the strike price.
Derivative Securities: Options (and futures) derive value from the underlying asset.
Option holders have no voting rights or ownership privileges.
Option Premium: Price paid to buy an option.
Options provide leverage, allowing investors to benefit from price movements with less capital.
Options are created by investors, not the underlying asset issuers.
Option Seller (Writer):
Receives premium upfront.
Obligated to sell (call) or buy (put) the asset.
Option Buyer:
Right to buy (call) or sell (put) at the strike price for a period.
Pays the option premium.
Can choose not to exercise the option.
Options trade in the open market.
Call:
Buyer wants the underlying asset price to increase.
Seller wants the underlying asset price to decrease.
Put:
Buyer wants the underlying asset price to decrease.
Seller wants the underlying asset price to increase.
Advantages:
Leverage: potential for large profits from small price movements.
Profit from rising or falling prices.
Disadvantages:
No interest or dividend income, no ownership benefits.
Options expire, limiting the time to profit.
Risky: price changes can render options worthless.
Expiration Date: Date option expires.
American Options: Exercisable any time up to expiration.
European Options: Exercisable only on the expiration date.
U.S. exchange-listed options are American options.
Option value depends on the underlying asset's price.
Other factors: time to expiration, stock volatility, interest rates.
Price potential on a call is unlimited. Price potential on a put is limited because stock price can't go below 0.
Determined by the relationship between strike price and market price.
In-the-Money:
Call: strike price < market price.
Put: strike price > market price.
Intrinsic value is greater than zero.
Out-of-the-Money:
Call: strike price > market price.
Put: strike price < market price.
At-the-Money: strike price = market price.
Put and call options with the same asset, strike price, and expiration date cannot move independently.
Put-Call Parity: Portfolios with a put and stock share payoffs with a portfolio containing a call and risk-free bond.
Knowing the underlying stock price, risk-free rate, and call option price allows determining the put value.