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Options Markets: Introduction
Faculty of Economics & Business
The University of SydneyShino Takayama
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Option Terminology Buy - Long Sell - Short Call Put Key Elements
Exercise or Strike Price Premium or Price Maturity or Expiration
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American vs European
American - the option can be exercised at any time before expiration or maturity.
European - the option can only be exercised on the expiration or maturity date.
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Profit and Payoff for Call
Notation Stock Price = ST Exercise Price =
XPayoff to Call Holder
(ST - X) if ST >X
0 if ST < XProfit to Call Holder
Payoff - Purchase Price
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Profit and Payoff for Call
Payoff to Call Writer - (ST - X) if ST >X
0 if ST < X
Profit to Call WriterPayoff + Premium
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Payoffs and Profits for puts
Payoffs to Put Holder0 if ST > X
(X - ST) if ST < X
Profit to Put Holder Payoff - Premium
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Payoffs and Profits for puts
Payoffs to Put Writer0 if ST > X
-(X - ST) if ST < X
Profits to Put WriterPayoff + Premium
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Protective Puts
Use - limit lossPosition - long the stock and long the
putPayoff ST < X ST > X
Stock ST ST
Put X - ST 0
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Covered Call
Use - Some downside protection at the expense of giving up gain potential.
Position - Own the stock and write a call.
Payoff ST < X ST > X
Stock ST ST
Call 0 - ( ST - X)
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Other Option Strategies
Straddle (Same Exercise Price)Long Call and Long Put
Spreads - A combination of two or more call options or put options on the same asset with differing exercise prices or times to expiration.