CHAPTER
14 Options Markets
? 2003 South-Western/Thomson Learning
Chapter Objectives
Explain how stock options are used to speculate
Explain why stock option premiums vary Explain how options are used by financial
Seller or writer of the option contract
Receives the premium up front Has an ongoing obligation to sell (call) or buy
(put) if the buyer decides to exercise the option contractБайду номын сангаас
At-the-money means the strike price equals the market price of the underlying asset
Background on Options
Expiration is the date when the contract matures
Note components of an option: specific quantity of asset, price, and time period
Background on Options
Premium is the price the buyer of the put or call pays to buy an option contract
At-the-money means the strike price equals the market price of the underlying asset
Background on Options
Put option
In-the-money means the put option’s strike or exercise price is higher than the market price for the underlying financial instrument
Put options give the investor an opportunity to make money from falling prices
Investor has locked in a sale price, making the price of the option (premium) higher as the stock price decreases
American-style options contracts can be exercised any time up until they expire
European-style options can only be exercised just before their expiration
institutions to hedge their security portfolios
Stock Options
An option contract grants the buyer, who has paid a premium to the seller (writer), the right to buy or sell the underlying asset at a stated price within a specific period of time
Option contracts guaranteed by a clearinghouse to make sure sellers or writers fulfill their obligations
The premium paid to the writer is the cost of the option
Buyer has the “option,” but not the obligation, to exercise the option
Background on Options
Current market price of the underlying asset or financial instrument is called the spot price
Background on Options
Call options
“In-the-money” means the call option’s strike or exercise price is lower than the market price for the underlying financial instrument
The holder of the call can buy the stock at a price below the current market price
The call premium (price) of the option would also be higher by the “in-the-money”
A call option buyer has right but not the obligation to buy the underlying asset at a set exercise or “strike” price for a specified period of time
A put option buyer has the right but not the obligation to sell the underlying asset at a set “strike” price for a specified period of time