chapter 10 options. differences btw options and futures, – an option contract permits the buyer to...

CHAPTER 10 OPTIONS

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.