Options Markets: Introduction

Faculty of Economics & Business

The University of SydneyShino Takayama

Option Terminology Buy - Long Sell - Short Call Put Key Elements

Exercise or Strike Price Premium or Price Maturity or Expiration

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.

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

Profit and Payoff for Call

Payoff to Call Writer - (ST - X) if ST >X

0 if ST < X

Profit to Call WriterPayoff + Premium

Payoffs and Profits for puts

Payoffs to Put Holder0 if ST > X

(X - ST) if ST < X

Profit to Put Holder Payoff - Premium

Payoffs and Profits for puts

Payoffs to Put Writer0 if ST > X

-(X - ST) if ST < X

Profits to Put WriterPayoff + Premium

Protective Puts

Use - limit lossPosition - long the stock and long the

putPayoff ST < X ST > X

Stock ST ST

Put X - ST 0

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)

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.