• Calls versus Puts – Call options gives the holder the right, but not the obligation, to buy a given quantity of some asset at some time in the future, at prices agreed upon today. When exercising a call option, you “call in” the asset. – Put options gives the holder the right, but not the obligation, to sell a given quantity of an asset at some time in the future, at prices agreed upon today. When exercising a put, you “put” the asset to someone.
• In-the-Money
– The exercise price is less than the spot price of the underlying asset.
• At-the-Money
– The exercise price is equal to the spot price of the underlying asset.
• Out-of-the-Money
– The exercise price is more than the spot price of the underlying asset.
Options Contracts: Prue
– The difference between the exercise price of the option and the spot price of the underlying asset.
– Refers to the fixed price in the option contract at which the holder can buy or sell the underlying asset.
• Expiry
– The maturity date of the option is referred to as the expiration date, or the expiry.
• Call options gives the holder the right, but not the obligation, to buy a given quantity of some asset on or before some time in the future, at prices agreed upon today.
• European versus American options
– European options can be exercised only at expiry. – American options can be exercised at any time up to expiry.
Options Contracts: Preliminaries
22.1 Options
• Many corporate securities are similar to the stock options that are traded on organized exchanges.
• Almost every issue of corporate stocks and bonds has option features.
• In addition, capital structure and capital budgeting decisions can be viewed in terms of options.
22.1 Options Contracts: Preliminaries
• An option gives the holder the right, but not the obligation, to buy or sell a given quantity of an asset on (or perhaps before) a given date, at prices agreed upon today.
Chapter Outline
22.1 Options 22.2 Call Options 22.3 Put Options 22.4 Selling Options 22.5 Reading The Wall Street Journal 22.6 Combinations of Options 22.7 Valuing Options 22.8 An Option-Pricing Formula 22.9 Stocks and Bonds as Options 22.10 Capital-Structure Policy and Options 22.11 Mergers and Options 22.12 Investment in Real Projects and Options 22.13 Summary and Conclusions
• Speculative Value
– The difference between the option premium and the intrinsic value of the option.
Option Premium
=
Intrinsic + Speculative
Value
Value
22.2 Call Options
22.1 Options Contracts: Preliminaries
• Exercising the Option
– The act of buying or selling the underlying asset through the option contract.
• Strike Price or Exercise Price