Slide 1

12345 6th Lecture 17th November 2003 Options Slide 2 12345 2 Basics Option contract grants the owner the right but not the obligation to take some action (see previous lectures) Call - right to purchase underlying at strike price at (european) / until (american) specified maturity Put - same as call but sell instead of buy Value of option is called options premium Options: at the money, in the money,out of the money Slide 3 12345 3 Performance Profile - long call STST -C K 45 degrees V T =max(S T -K,0) Slide 4 12345 4 Performance Profile - short call C KSTST Slide 5 12345 5 Performance Profile - long put -P K STST V T =max(K-S T,0) Slide 6 12345 6 Performance Profile - short put STST P Slide 7 12345 7 Positions in the underlying instrument STST Long underlying Short underlying Slide 8 12345 8 Trading strategies: underlying & call option Long underl. & short call covered call Short underlying & long call writing cov. call Slide 9 12345 9 Trading Strategies: underlying & put option Long underl. & long put Short underl. & short put Slide 10 12345 10 Bull Spreads with calls STST X1X2 Short call strike X2 Long call strike X1 Payoff S T Long call Short call Total S T >X2 S T -X1 X2-S T X2-X1 X1 12345 12 Bear spreads (with calls) STST X1X2 Payoff S T long call short call total S T >X2 S T -X2 X1-S T -(X2-X1) X1