chapter 10 options. differences btw options and futures, – an option contract permits the buyer to...
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CHAPTER 10 OPTIONS
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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.
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OPTIONS
OPTION WRITER= SELLER OF AN OPTIONS CONTRACT.
OPTION HOLDER= BUYER CONTRACTS TYPES;
– CALL OPTION– PUT OPTION
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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)
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OPTIONS
OPTIONS ARE NOT LIMITED TO COMMON STOCK. THEY ARE WRITTEN ON;– BONDS– CURRENCIES– FOREIGN EXCHANGE– SPECIFIC INDUSTRIES INDEXES
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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.
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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.
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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.