call option

• Call Option

https://store.theartofservice.com/the-call-option-toolkit.html

London Stock Exchange - MTS

1 In 2007, after Borsa Italiana announced its call option exercise right to acquire full control of MBE

Holdings, the combined Group would now control Mercato del Titoli di

Stato, or MTS. This merger of Borsa Italiana and MTS with the London Stock Exchange’s existing bond

listing business, enhanced the range of covered European fixed income

markets.https://store.theartofservice.com/the-call-option-toolkit.html

Valuation (finance) - Valuation overview

1 #Valuation of options|Option pricing models are used for certain types of financial assets

(e.g., Warrant (finance)|warrants, put options, call options, employee stock options, investments with embedded

options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black–Scholes-Robert C. Merton|Merton

models and lattice model (finance)|lattice models.


Demand response - Electricity pricing

1 In effect, consumers served under these fixed rate tariffs are endowed

with real call options on electricity.Borlick, Robert L., Pricing Negawatts - DR design flaws create

perverse incentives, PUBLIC UTILITIES FORTNIGHTLY, August

2010.


Patent valuation - Option-based method

1 Thus patent rights can be thought of as corresponding to a call option and

may be Option (finance)#Model implementation|valued

correspondingly


Economics and patents - Patent valuation

1 Thus patent rights can be thought of as corresponding to a call option and

may be Option (finance)#Model implementation|valued

correspondingly


Security (finance)

1 A 'security' or 'financial instrument' is a tradable asset of any kind.The United States Securities Exchange Act of 1934 defines a security as: Any note, stock,

treasury stock, Government investment|bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or

other mineral royalties|royalty or lease, any collateral (finance)|collateral Trust certificate (finance)|trust certificate, preorganization certificate or

subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put option|put, call option|call,

straddle, option (finance)|option, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle,

option, or privilege entered into on a national Exchange (organized market)|securities exchange relating to foreign currency, or in general, any Financial instrument|instrument commonly known as a security; or any certificate of

interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall

not include currency or any note, draft, bill of exchange, or banker's acceptance which has a Maturity (finance)|maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof

the maturity of which is likewise limited


Electricity market - Risk management

1 Many other Hedge (finance)|hedging arrangements, such as swing

contracts, Virtual Bidding, Financial Transmission Rights, call options and

put options are traded in sophisticated electricity markets. In

general they are designed to transfer financial risks between participants.


Corporate finance - Valuing flexibility

1 Again, a DCF valuation would capture only one of these outcomes.) Here: (1) using Option

(finance)|financial option theory as a framework, the decision to be taken is identified as

corresponding to either a call option or a put option; (2) an appropriate valuation technique is

then employed – usually a variant on the Binomial options model or a bespoke Monte Carlo methods in finance|simulation model,

while Black-Scholes formula|Black Scholes type formulae are used less often; see Contingent

claim valuation


Executive pay

1 It is typically a mixture of salary, bonuses, shares of or call options on the company stock, benefits,

and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive,

and rewards for performance.[http://books.google.com/books?

id=hBPaskPAJUQCprintsec=frontcoverdq=executive+payhl=ensa=Xei=wtl5T_CNDYuM0QHP-

7STDQved=0CEAQ6AEwAQ#v=onepageq=executive%20payf=false The complete guide to

executive compensation] By Bruce R


Executive pay - Stock options

1 This is because the value of a call option increases with increased Volatility (finance)|volatility (see

options pricing)


Channel coordination - Options

1 as buy rights to purchase more (call

option) or return


Eurowings - History

1 As at 31 December 2006, Lufthansa had a 49% shareholding in Eurowings with a call option for 50.91% of the

remaining stakes, bringing the company into the Lufthansa Group

fold


Australian Securities Exchange - Timeline of significant events

1 '1976': The Australian Options Market was

established, trading call options.


Vienna Capital Partners - Investment in BorsodChem

1 The stake and call option were provided partly in return for a 140

million Euros investment from Wanhua, which BorsodChem would

put towards the completion of a toluene diisocyanate (TDI) plant and a nitric acid facility at its main site at

Kazincbarcika, Hungary


Commodity market - Call options

1 In a call option counterparty|counterparties enter into a financial

contract option where the buyer purchases the right but not the

obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time

(the expiration date) for a certain price (the strike price)


Right of first refusal

1 'Right of first refusal' ('ROFR' or 'RFR') is a contractual right that gives

its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to

enter into that transaction with a third party. In brief, the right of first refusal is similar in concept to a call

option.https://store.theartofservice.com/the-call-option-toolkit.html

Insider trading - Court decisions

1 O'Hagan used this inside information by buying call options on Pillsbury

stock, resulting in profits of over $4 million


Employee stock option

1 An 'employee stock option' ('ESO') is commonly viewed as a complex call option on the common

stock of a company, granted by the company to an employee as part of the employee's Remuneration|

remuneration package.[http://www.esopdirect.com/faq.html see

Employee Stock Option FAQ's] Regulators and economists have since specified that employee stock

options is a label that refers to compensation contracts between an employer and an employee

that carries some characteristics of financial options but are not in and of themselves options (that is they

are compensation contracts).


Employee stock option

1 From the employee's point of view, the compensation contract provides a conditional right to buy the equity of the employer and when modeled

as an option, the employee's perspective is that of a long position

in a call option


Employee stock option - Objectives

1 Employee stock options are similar to exchange traded call options issued

by a company with respect to its own stock.


Employee stock option - Contract differences

1 There is a substantial risk that when the ESOs are granted (perhaps

50%[http://www.hoadley.net/options/optiongraphs.aspx Call Option Price Time Value by Stock Price]) that the options

will be worthless at expiration.http://www.hoadley.net/option

s/probgraphs.aspx This should encourage the holders to reduce risk by

selling exchange traded call options


At the money

1 In finance, 'moneyness' is the relative position of the current price

(or future price) of an underlying asset (e.g., a stock) with respect to

the strike price of a derivative (finance)|derivative, most commonly

a call option or a put option


At the money

1 It can be measured in percentage probability of expiring in the money,

which is the forward value of a binary call option with the given strike,


At the money - Example

1 Suppose the current stock price of IBM is $100. A call option|call or put option with a strike of $100 is at-the-money. A call option with a strike of $80 is in-the-money (100 minus; 80

= 20 gt; 0). A put option with a strike at $80 is out-of-the-money (80 minus; 100 = minus;20 lt; 0).

Conversely, a call option with a $120 strike is out-of-the-money and a put option with a $120 strike is in-the-

money.


At the money - Intrinsic value and time value

1 The intrinsic value (or monetary value) of an option is its value

assuming it were exercised immediately. Thus if the current

(Spot price|spot) price of the underlying security (or commodity etc.) is above the agreed (Strike

price|strike) price, a Call option|call has positive intrinsic value (and is called in the money), while a Put

option|put has zero intrinsic value (and is out of the money).


At the money - In the money

1 An 'in the money' (ITM) option has positive intrinsic value as well as time value. A call option is in the

money when the strike price is below the spot price. A put option is in the

money when the strike price is above the spot price.


At the money - Out of the money

1 An 'out of the money' (OTM) option has no intrinsic value. A call option is

out of the money when the strike price is above the spot price of the underlying security. A put option is out of the money when the strike

price is below the spot price.


At the money - Simple examples

1 Thus a 25 Delta call option has less than 25% moneyness, usually

slightly less, and a 50 Delta ATM cal option has less than 50%

moneyness; these discrepancies can be observed in prices of binary

options and vertical spreads


Quantitative analysis (finance) - History

1 It provided a solution for a practical problem, that of finding a fair price for a European call option, i.e., the right to buy one share of a given

stock at a specified price and time


Derivative (finance) - Common derivative contract types

1 The buyer of a Call option has a right to buy a certain quantity of the

underlying asset, at a specified price on or before a given date in the

future, he however has no obligation whatsoever to carry out this right


Put option

1 Puts may also be combined with other derivatives as part of more

complex investment strategies, and in particular, may be useful for

Hedge (finance)|hedging. Note that by put-call parity, a European put

can be replaced by buying the appropriate call option and selling an

appropriate forward contract.


Rational pricing - Options

1 It is possible to create a position consisting of 'Δ' shares and 1 call

option|call sold, such that the position’s value will be identical in the S up and S down states, and hence known with certainty (see

Delta hedging)


Long-Term Capital Management - 1998 bailout

1 LTCM's strategies were compared (a contrast with the market efficiency

aphorism that there are no $100 bills lying on the street, as someone else

has already picked them up) to picking up nickels in front of a bulldozer – a likely small gain

balanced against a small chance of a large loss, like the payouts from

selling an out-of-the-money naked call option.


Valuation of options - Intrinsic value

1 For a call option, the option is in-the-money if the underlying price is

higher than the strike price; then the intrinsic value is the underlying price

minus the strike price


Valuation of options - Intrinsic value

1 : = current stock price – strike price (call option)


Valuation of options - Time value

1 * Price of the underlying: Any fluctuation in the price of the

underlying (stock/index/commodity) obviously has the largest impact on premium of an option contract. An

increase in the underlying price increases the premium of call option and decreases the premium of put

option. Reverse is true when underlying price decreases.


Agency Theory - Options framework

1 At the same time, since equity may be seen as a call option on the value

of the firm, an increase in the variance in the firm value, other

things remaining equal, will lead to an increase in the value of equity,

and stockholders may therefore take risky projects with negative net

present values, which while making them better off, may make the

bondholders worse offhttps://store.theartofservice.com/the-call-option-toolkit.html

Agency Theory - Tournaments

1 like a call option on performance (which increases in value with

increased Volatility (finance)|volatility (cf. options pricing).


Business valuation - Option pricing approaches

1 In general, equity may be viewed as a call option on the firm, [http://links.jstor.org/sici?

sici=0022-3808%28197305%2F06%2981%3A3%3C637%3ATPOOAC%3E2.0.CO%3B2-P] and this allows for the valuation of troubled firms which may

otherwise be difficult to analyse;Aswath Damodaran (Stern School of Business):

[http://people.stern.nyu.edu/adamodar/pdfiles/Seminars/AIMR3.pdf Valuing Firms in Distress]


Call option

1 The buyer of the call option has the right, but not the obligation to buy an

agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the

expiration date) for a certain price (the strike price)


Call option

1 The seller of the call is said to have shorted the call option, and keeps

the premium (the amount the buyer pays to buy the option) whether or not the buyer ever exercises the

option


Call option

1 Since the payoff for sold, or written call options increases as the stock

price falls, selling call options is considered bearish


Call option

1 Strike price: this is the price at which you can buy the stock (if you have bought a call option) or the price at which you must sell your stock (if

you have sold a call option).


Call option

1 The initial transaction in this context (buying/selling a call option) is not

the supplying of a physical or financial asset (the underlying

instrument). Rather it is the granting of the right to buy the underlying asset, in exchange for a fee— the

option price or premium.


Call option

1 Exact specifications may differ depending on option style. A

European option|European call option allows the holder to exercise the option (i.e., to buy) only on the

option expiration date. An American option|American call option allows

exercise at any time during the life of the option.


Call option

1 In contrast, when a call option is exercised, the underlying asset is

transferred from one owner to another.


Call option - Example of a call option on a stock

1 * ABC Corp stock subsequently goes up to $60 per share before the contract expires.

Christina exercises the call option by buying 100 shares of ABC from Stacey for a total of $5,000. Christina then sells the stock on the market at market price for a total of $6,000. Christina has paid a $500 contract premium

plus a stock cost of $5,000, for a total of $5,500. She has earned back $6,000,

yielding a net profit of $500.


Call option - Example of a call option on a stock

1 Her total costs are then the $5 per share premium for the call option,

plus $50 per share to buy the shares from Stacey, for a total of $5,500


Call option - Value of a call

1 Let \Pi be a call option for this instrument, purchased at time 0,

expiring at time T\in\mathbb^, with exercise (strike) price K\in\mathbb;

and let S:[0,T]\to\mathbb be the price of the underlying instrument.


Call option - Value of a call

1 Hence the pay-off, i.e. the value of the call option at expiry,

is


Call option - Price of options

1 Adjustment to Call Option:


Call option - Price of options

1 When a call option is in-the-money i.e. when the buyer is making profit, she has many options. Some of them

are as follows:


Hedge (finance) - Related concepts

1 ** Call option: A contract that gives the owner the right, but not the obligation, to buy an item in the future, at a price decided now.


Black–Scholes model - Criticism

1 2, 2011 They also assert that Boness in 1964 had already published a

formula that is actually identical to the Black–Scholes call option pricing

equation.Boness, A James, 1964, Elements of a theory of stock-option value, Journal of Political Economy,

72,


Stock - Stock derivatives

1 Apart from employee stock option|call options granted to employees,

most stock options are transferable.


Option (finance)

1 Both are commonly traded, but for clarity, the call option is more frequently discussed.


Option (finance) - Contract specifications

1 * whether the option holder has the right to buy (a call option) or the

right to sell (a put option)


Option (finance) - Example

1 We can calculate the estimated value of the call option by applying the

hedge parameters to the new model inputs as:


Option (finance) - Long call

1 A trader who believes that a stock's price will 'increase' might buy the right to

purchase the stock (a call option) at a fixed price, rather than just purchase the stock itself. He would have no obligation to buy the stock, only the right to do so until the

expiration date. If the stock price(spot Price,S) at expiration is above the exercise price(X) by more than the premium (price)

paid P, he will profit i.e. if S-Xref name=GlobalCitation


Exotic option - Features

1 A straight call option|call or put option|put option, either Option style|American or Option style|European, would be considered non-exotic or

vanilla option. There is no strict definition of what is considered an

exotic option but it could have one or more of the following features:


Bond (finance) - Others

1 ** Callability — Some bonds give the issuer the right to repay the bond

before the maturity date on the call dates; see call option


Real options valuation

1 For example, the opportunity to invest in the expansion of a firm's factory, or alternatively to sell the factory, is a real call option|call or

put option, respectively


Real options valuation - Options relating to project size

1 This is equivalent to a call option.


Real options valuation - Options relating to project size

1 *'Option to expand or contract': Here the project is designed such that its operation

can be dynamically turned on and off. Management may shut down part or all of

the operation when conditions are unfavourable (a put option), and may restart operations when conditions improve (a call option). A flexible manufacturing system (FMS) is a good example of this type of option. This option is also known as a

'Switching option'.https://store.theartofservice.com/the-call-option-toolkit.html

Real options valuation - Options relating to project life and timing

1 *'Initiation or deferment options': Here management has flexibility as

to when to start a project. For example, in natural resource

exploration a firm can delay mining a deposit until market conditions are

favorable. This constitutes an American option|American styled call

option.


Futures contract - Options on futures

1 A put option|put is the option to sell a futures contract, and a call option|

call is the option to buy a futures contract


Commercial banking - Unsecured loan

1 Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known

as convertible bonds, allow investors to convert the bond into equity.


Investor

1 An 'investor' is a person who allocates capital with the expectation of a financial return. The types of investments include: gambling and

speculation, stock|equity, Bond (finance)|debt Security (finance)|securities, real estate,

currency, commodity, derivatives such as put and call options, etc. This definition makes no distinction between those in the primary and secondary markets. That is, someone who provides a business with capital and

someone who buys a stock are both investors.


Troubled Asset Relief Program - American Bankers Association's attempts to expunge the TARP warrants

1 Warrants are call options that add to the number of shares of stock

outstanding if they are exercised for a profit


Securities

1 A 'security' is a tradable asset of any kind.The United States Securities Exchange Act of 1934 defines a security as: Any note, stock, treasury stock,

Government investment|bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalties|royalty or lease, any collateral (finance)|collateral Trust

certificate (finance)|trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate,

certificate of deposit, for a security, any put option|put, call option|call, straddle, option (finance)|option, or group or index of securities (including any

interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national Exchange (organized market)|securities exchange relating to foreign currency, or in general, any Financial instrument|instrument commonly known as a security; or any certificate of

interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall

not include currency or any note, draft, bill of exchange, or banker's acceptance which has a Maturity (finance)|maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof

the maturity of which is likewise limited


Warrant (finance) - Comparison with call options

1 Warrants are very similar to call options. For instance, many warrants

confer the same rights as equity options and warrants often can be traded in secondary markets like options. However, there also are several key differences between

warrants and equity options:


Warrant (finance) - Comparison with call options

1 When a call option is exercised, the owner of the call option receives an existing share from an assigned call

writer (except in the case of employee stock options, where new shares are created and issued by the

company upon exercise)


Warrant (finance) - Naked

1 Financially they are also similar to call options, but are typically bought

by retail investors, rather than investment funds or banks, who

prefer the more keenly priced options which tend to trade on a different

market


Warrant (finance) - Third-party warrants

1 Third-party warrants are essentially long-term call

options


Convertible bond - Types

1 *'Reverse convertibles' are a less common variation, mostly issued synthetically. They would be opposite of the vanilla structure:

the conversion price would act as a knock-in short call option: as the stock price drops below the conversion price the investor

would start to be exposed the underlying stock performance and no longer able to

redeem at par its bond. This negative convexity would be compensated by a usually high regular coupon payment.


Convertible bond - Types

1 *'Packaged convertibles' or sometimes Bond + Option structures are simply a straight bonds and a call

option/warrant wrapped together


Convertible bond - Additional features

1 This should not be mistaken for a call

option


Convertible bond - Uses for investors

1 *Also, convertible bonds are usually less volatile than regular shares.

Indeed, a convertible bond behaves like a call option. Therefore, if C is

the call price and S the regular share then


High-yield debt - Debt repackaging and subprime crisis

1 Removing toxic assets would also reduce the volatility of banks' stock

prices. Because stock is akin to a call option on a firm's assets, this lost

Volatility (finance)|volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.


Fuel hedging

1 If a large fuel consuming company buys a fuel call option, which

requires an upfront premium cost, much like insurance, and the price of fuel decreases, the company will not

receive a return on the option but they will benefit from buying fuel at

the then lower cost.


Reverse greenshoe

1 A 'Reverse greenshoe' is a special provision (accounting)|provision in an Initial Public Offering|IPO prospectus (finance)|prospectus, which allows underwriters to sell shares back to

the issuer. If a 'regular' greenshoe is, in fact, a call option written by the

issuer for the underwriters, a reverse greenshoe is a put option.


Reverse greenshoe - How regular greenshoe option works

1 *Regular greenshoe option is a physically settled call option given to

the underwriter by the issuer.


Option contract - Introduction

1 * 'Call options', which give the beneficiary the right to require the

grantor to sell or convey the property to them at the agreed price on

exercise


PCP

1 *Put–call parity, in financial mathematics a relationship between the price of a call option and a put

option


Emergency Economic Stabilization Act of 2008 - Mortgage asset purchases

1 Because stock is a call option on a firm's assets, this lost Volatility

(finance)|volatility will hurt the stock price of distressed banks


Strike price

1 In finance, the 'strike price' (or 'exercise price') of an option

(finance)|option is the fixed price at which the owner of the option can

buy (in the case of a call option|call), or sell (in the case of a put option|

put), the underlying security or commodity.


Strike price - Moneyness

1 * A call option is in-the-money if the strike price is below the market price

of the underlying stock.


Strike price - Moneyness

1 * A call option is out-of-the-money if the strike price is above the market

price of the underlying stock.


Strike price - Mathematical formula

1 A call option has positive monetary value at expiration when the

underlying has a spot price ('S') above the strike price ('K'). Since the option will not be exercised unless it is in-the-money, the payoff for a call

option is


Capital Purchase Program - Warrants

1 Warrants are call options that add to the number of shares of stock

outstanding if they are exercised for a profit


Public-Private Investment Program for Legacy Assets - Criticism

1 Because stock is a call option on a firm's assets, this lost Volatility

(finance)|volatility will hurt the stock price of distressed banks


9/11 conspiracy theories - Suspected insider trading

1 This compares with a mere 748 call

options in American purchased that day


9/11 conspiracy theories - Suspected insider trading

1 Raytheon, a defense contractor, had an anomalously high number of call options trading on September 10. A

Raytheon option that makes money if shares are more than $25 each had 232 options contracts traded on the day before the attacks, almost six

times the total number of trades that had occurred before that day.


Margin (finance) - Types of margin requirements

1 ;Example 1: An investor sells a call option, where the buyer has the right

to buy 100 shares in Universal Widgets S.A


Short (finance) - Short selling terms

1 This has important implications for derivatives pricing and strategy, as the borrow cost itself can become a significant convenience yield for holding the stock (similar to additional

dividend) - for instance, put-call parity relationships are broken and the Exercise

(options)|early exercise feature of American call options on non-dividend paying stocks can become Exercise (options)#Exercise Considerations|rational to exercise early,

which otherwise would not be economical.


Treasury stock - Incentives

1 Finally, if the sellers into a corporate buyback are actually the call option

holders themselves, they may directly benefit from temporary unrealistically favorable pricing.


Investors

1 The types of investments include: stock|equity, Bond (finance)|debt Security (finance)|securities, real

estate, currency, commodity, derivatives such as put and call

options, etc


Put/call ratio

1 'Put/call ratio' (or put–call ratio, PCR) is a technical indicator demonstrating investors'

sentiment.[http://www.investopedia.com/terms/p/putcallratio.asp Put–Call Ratio] The ratio represents a proportion between all the put options and all the call options purchased on

any given day. The put/call ratio can be calculated for any individual stock, as well as

for any index, or can be aggregated. The ratio may be calculated using the numbers of puts and calls or on a dollar-weighted basis.


Exchange-traded fund - Trading

1 Also, many ETFs have the capability for Option (finance)|options (Put

option|puts and Call option|calls) to be written against them


Economic stability - Firm-Level Stability Measures

1 In this model, an institution’s equity (finance)|equity is treated as a call

option on its held assets, taking into account the volatility of those assets


Risk-neutral measure - Usage

1 Risk-neutral measures make it easy to express the value of a derivative in a formula. Suppose at a future

time T a derivative (e.g., a call option on a stock) pays H_T units, where H_T is a random variable on the probability space describing the market. Further suppose that the

discount factor from now (time zero) until time T is P(0, T). Then today's

fair value of the derivative ishttps://store.theartofservice.com/the-call-option-toolkit.html

Quantum finance - Quantum continuous model

1 With this new assumption in place, they derive a quantum finance model

as well as a European call option formula.


Volatility arbitrage - Overview

1 Because of the put–call parity, it doesn't matter if the options traded are call option|calls or put option|

puts


Volatility arbitrage - Market (Implied) Volatility

1 For example, assume a call option is trading at $1.90 with the underlier's

price at $45.50 and is yielding an implied volatility of 17.5%


Long (finance)

1 An Option_(finance)|options investor goes long on the Underlying|

underlying instrument by buying call options or writing put options on it.


Marketable securities

1 A 'security' is a tradable financial asset of any kind.The United States Securities Exchange Act of 1934 defines a security as: Any note, stock, treasury stock, Government investment|bond, debenture, certificate of

interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalties|royalty or lease, any collateral (finance)|collateral Trust certificate (finance)|trust certificate, preorganization certificate or

subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put option|put, call option|call,

straddle, option (finance)|option, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle,

option, or privilege entered into on a national Exchange (organized market)|securities exchange relating to Currency|foreign currency, or in general, any

Financial instrument|instrument commonly known as a security; or any certificate of interest or participation in, temporary or interim certificate for,

receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange,

or banker's acceptance which has a Maturity (finance)|maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any

renewal thereof the maturity of which is likewise limited


Compensation in the United States - Employee stock options

1 Employee stock options[http://www.esopdirect.com/fa

q.html see Employee Stock Option FAQ's] are call options on the common stock of a company


Long/short equity

1 'Long/short equity' is an investment strategy generally associated with hedge

funds, and more recently certain progressive traditional asset managers. It involves

buying long equities that are expected to increase in value and selling short equities

that are expected to decrease in value. This is different from the risk reversal strategies

where investors will simultaneously buy a call option and sell a put option to simulate being

long in a stock.


Vedanta Resources - Zinc

1 Hindustan Zinc Ltd: HZL is headquartered in Udaipur in the state of Rajasthan. HZL’s equity

shares are listed and traded on the NSE and BSE. Sterlite owns 64.9% of

the share capital in HZL and has management control. Sterlite has a

call option to acquire the government of India’s remaining ownership

interest.https://store.theartofservice.com/the-call-option-toolkit.html

Implied volatility - Example

1 A call option is trading at $1.50 with the underlying trading at $42.05. The

implied volatility of the option is determined to be 18.0%. A short time later, the option is trading at

$2.10 with the underlying at $43.34, yielding an implied volatility of

17.2%. Even though the option's price is higher at the second

measurement, it is still considered cheaper based on volatility.


Implied volatility - Example

1 The reason is that the underlying needed to hedge the call option can be sold for a higher

price.


Shareholders' agreement

1 By putting put and call options in a shareholders' agreement, the parties can ensure that a dissenting minority

can be bought out at a fair value without destroying the company.


Parity

1 * Put–call parity, in financial mathematics, defines a relationship between the price of a European call

option and a European put option


Bond option

1 Generally, one buys a call option on the bond if one believes that interest rates will fall,

causing an increase in bond prices. Likewise, one buys the put option if one believes that

the opposite will be the case. [http://financial-dictionary.thefreedictionary.com/Bond

%2boption] One result of trading in a bond option, is that the price of the underlying

bond is locked in for the term of the contract, thereby reducing the credit risk associated

with fluctuations in the bond price.


Bond option - Embedded options

1 *Callable bond: allows the issuer to buy back the bond at a

predetermined price at a certain time in future. The holder of such a bond

has, in effect, sold a call option to the issuer. Callable bonds cannot be

called for the first few years of their life. This period is known as the lock

out period.


Bond option - Relationship with caps and floors

1 European Put options on zero coupon bonds can be seen to be equivalent to suitable caplets, i.e. interest rate

cap components, whereas call options can be seen to be equivalent to suitable floorlets, i.e. components

of interest rate floors. See for example Brigo and Mercurio (2001),

who also discuss bond options valuation with different models.


Hybrid security - Traditional hybrids

1 In addition, some of these securities include minimum and maximum

conversion terms, effectively giving the holder a put and call option if the share price reaches a certain prices.


Greeks (finance) - Practical use

1 For a vanilla option, delta will be a number between 0.0 and 1.0 for a long Call option|call (or a short put)

and 0.0 and −1.0 for a long Put option|put (or a short call);

depending on price, a call option behaves as if one owns 1 share of the underlying stock (if deep in the

money), or owns nothing (if far out of the money), or something in

between, and conversely for a put option


Greeks (finance) - Practical use

1 For example, if a portfolio of 100 American call options on XYZ each have a delta of 0.25 (=25%), it will

gain or lose value just like 25 shares of XYZ as the price changes for small

price movements


Potential future exposure - Relevance

1 When the rare event occurs, the person (or more likely her employer)

who wrote the insurance (or in options terminology - the person who

was short (finance)|short a put option|put or call option|call / shorted

volatility (finance)|volatility / was short gamma) sustains massive

losses and may go bankrupt


Myron Scholes

1 The model provides a conceptual framework for valuing Option

(finance)|options, such as call option|calls or put option|puts, and is

referred to as the Black–Scholes model.


Options Clearing Corporation

1 Under its SEC jurisdiction, OCC clears transactions for put and call option (finance)|options on common stock and other equity issues, stock Index

(economics)|indexes, foreign currencies, interest rate composites

and single-stock futures


Covered warrant - Structure and features

1 A covered warrant gives the holder the right, but not the obligation, to buy (Call option|call warrant) or to

sell (Put option|put warrant) an underlying asset at a specified price

(the strike or exercise price) by a predetermined date


Garman–Kohlhagen model - Example

1 This type of contract is both a call option|call on dollars and a put

option|put on Pound sterling|sterling, and is typically called a GBPUSD put, as it is a put on the exchange rate;

although it could equally be called a USDGBP call.


Garman–Kohlhagen model - Terms

1 * Call option – the right to buy an asset at a fixed date and price.


Garman–Kohlhagen model - Terms

1 For example, a call option on oil allows the investor to buy oil at a

given price and date. The investor on the other side of the trade is in effect selling a put option on the currency.


Garman–Kohlhagen model - Valuation: the Garman–Kohlhagen model

1 Then the domestic currency value of a call option into the foreign currency is


Cazenove (stock broker) - Merger with JPMorgan Chase

1 In November 2004, Cazenove and JPMorgan Chase announced an

agreement that JP Morgan would buy a 50% stake in Cazenove and merge UK investment banking operations,

with a call option to buy the remaining 50% stake within five

years.


Put-call parity

1 In financial mathematics, 'put–call parity' defines a relationship

between the price of a European call option and European put option, both

with the identical strike price and expiry, namely that a portfolio of long a call option and short a put option is equivalent to (and hence

has the same value as) a single forward contract at this strike price

and expiryhttps://store.theartofservice.com/the-call-option-toolkit.html

Put-call parity - Derivation

1 We will suppose that the put and call options are on traded stocks, but the

underlying can be any other tradeable asset. The ability to buy and sell the underlying is crucial to the no arbitrage argument below.



1 Consider a call option and a put option with the same strike K for

expiry at the same date T on some stock S, which pays no dividend. We

assume the existence of a Bond (finance)|bond that pays 1 dollar at

maturity time T. The bond price may be random (like the stock) but must

equal 1 at maturity.



1 Let the price of S be S(t) at time t. Now assemble a portfolio by buying a call option

C and selling a put option P of the same maturity T and strike K. The payoff for this portfolio is S(T) - K. Now assemble a second portfolio by buying one share and borrowing

K bonds. Note the payoff of the latter portfolio is also S(T) - K at time T, since our share bought for S(t) will be worth S(T) and

the borrowed bonds will be worth K.


Binomial options pricing model - STEP 2: Find Option value at each final node

1 :Extreme value|Max [ (S_n-K), 0 ], for a call

option


Annual Percentage Rate - Not a comparable standard

1 In effect, the lease includes a put option back to the manufacturer (or,

alternatively, a call option for the consumer), and the value (or cost) of

this option to the consumer is not transparent.


Callable bond

1 The price behaviour of a callable bond is the opposite of that of

puttable bond. Since call option and put option are not mutually

exclusive, a bond may have both options

embedded.[http://nd.edu/~zda/TeachingNote_ConvertibleBonds.pdf

Teaching Note on Convertible Bonds]


Callable bond - Pricing

1 * Price of a callable bond is always lower than the price of a straight

bond because the call option adds value to an

issuer.[http://www.ambassador-capital.com/def/CallableBonds.htm

Callable Bonds]


Turbo warrant

1 For comparison, a regular call option will have a positive value at expiry

whenever the spot price settles above the strike price. A turbo will

have a positive value at expiry when the spot settle above the strike AND the spot has never fallen below the strike during the life of the option (if it had done so the option would have

crossed the barrier (=strike) and would have become worthless).


Straddle - Long straddle

1 A long straddle involves going long, i.e., purchasing, both a call option and a put option on some stock, interest rate, index (economics)|

index or other underlying



1 If the price goes down, he uses the put option and ignores the

call option



1 If the stock is sufficiently volatile and option duration is long, the trader

could profit from both options. This would require the stock to move both

below the put option's strike price and above the call option's strike price at different times before the

expiry date.


Constant elasticity of variance model - Dynamic

1 Further Results of the Constant Elasticity of Variance Call Option Pricing Model


Fund derivative - Types

1 Typical fund derivatives might be a call option on a fund, a CPPI on a

fund, or a leveraged note on a fund


Real estate derivative - Call

1 With the real estate call option, property owner can sell an option in exchange for debt-free cash today. Investor, who buys the real estate call option benefits from property

price appreciation and price volatility.


Coherent risk measure - Properties

1 That is, if portfolio Z_2 always has better values than portfolio Z_1 under almost surely|almost all

scenarios then the risk of Z_2 should be less than the risk of Z_1. E.g. If

Z_1 is an in the money call option (or otherwise) on a stock, and Z_2 is also

an in the money call option with a lower strike price.


Exercise (options)

1 When exercising a call option, the owner of the option purchases the underlying shares (or commodities, fixed interest securities, etc.) at the strike price from the option seller,

while for a put option, the owner of the option sells the underlying to the

option seller, again at the strike price.


Exercise (options) - Exercise Considerations

1 # For an American-style call option, 'early exercise' is a possibility whenever the

benefits of being long the underlier outweigh the cost of surrendering the option early. For instance, on the day before an ex-dividend

date, it may make sense to exercise an equity call option early in order to collect the

dividend. In general, equity call options should only be exercised early on the day

before an ex-dividend date, and then only for deep Moneyness|in-the-money options.


Exercise (options) - Early Exercise Strategy

1 A common strategy among professional option traders is to sell large quantities of in-the-

money calls just prior to an ex-dividend date. Quite often, non-professional option traders

may not understand the benefit of exercising a call option early, and therefore may

unintentionally forgo the value of the dividend. The professional trader may only be 'assigned' on a portion of the calls, and therefore profits by receiving a dividend on the stock used to

hedge the calls that are not exercised.


Options strategies

1 Options strategies allow to profit from movements in the underlying

that are bullish, bearish or neutral. In the case of neutral strategies, they can be further classified into those

that are bullish on volatility and those that are bearish on volatility. The option positions used can be long (finance)|long and/or short (finance)|short positions in call

option|calls.https://store.theartofservice.com/the-call-option-toolkit.html

Options strategies - Neutral or non-directional strategies

1 *Collar (finance)|Collar - buy the underlying and then simultaneous

buying of a put option below current price (floor) and selling a call option

above the current price (cap).


Options strategies - Neutral or non-directional strategies

1 *Jade Lizard option strategy|Jade Lizard - a bull vertical spread created using call options, with the addition of a put option sold at a strike price lower than the strike prices of the call spread in the same expiration

cycle.


Risk metric - Risk measure and risk metric

1 * Calculate the implied volatility of the stock from some specified call option on the stock.


Extendible bond

1 'Extendible bond' (or extendable bond[http://www.investorwords.com/7282/exten

dable_bond.html extendable bond]) is a complex bond with the embedded option for a holder to extend its maturity date by a number

of years.[http://lexicon.ft.com/term.asp?t=extendable-bond Financial Times Lexicon]

[http://classes.uleth.ca/200803/mgt3412a/ch02.ppt Investment Alternatives] Such a bond may

be considered as a portfolio of a straight, shorter-term bond and a call option to buy a

longer-term bond


Notional amount - Equity options

1 So, for instance, if you purchase a 100 share equity call option with a strike of $60 for a stock that is currently trading at $60, then

you have the same upside potential as someone who holds $6,000 of stock (1

option * 100 multiplier * $60), but you may have paid only $5/share (for a total of $500),

so by this measure you have achieved Leverage (finance)|leverage of $6,000/$500 = 12x.A different measure of leverage would

be your Delta (finance)|Delta


Notional amount - Foreign Currency/Exchange or FX derivatives

1 Suppose you have a call option on USD/JPY struck at 110, and you buy

one of these. Then this gives you the option to pay 100 USD and receive 110 x 100 = 11,000 JPY, so the USD

notional is 100 USD, and the JPY notional is 11,000 JPY.


Puttable bond

1 The price behaviour of puttable bonds is the opposite of that of a

callable bond. Since call option and put option are not mutually

exclusive, a bond may have both options

embedded.[http://nd.edu/~zda/TeachingNote_ConvertibleBonds.pdf

Teaching Note on Convertible Bonds]


Constant proportion portfolio insurance

1 provide a capital guarantee against downside risk. The outcome of the

CPPI strategy is somewhat similar to that of buying a call option, but the

strategy does not make use of option contracts.


Risk reversal - Risk Reversal investment strategy

1 Then as the stock goes up in price, the call option will be worth more, and the put option will be worth

less.http://www.quantprinciple.com/invest/index.php/docs/quant_strategies/riskreversal/ Theory of Risk Reversal


Dynamic Hedging - Insurance

1 For example, bonds and equities can be used to replicate a call option. The call option can then be easily valued

as the value of the bond/equity portfolio, hence not requiring one to

value the call option directly.


Options (finance) - According to the option rights

1 * Call options give you the right but not the obligation, to buy something at a specific price for a specific time

period.


Frecuencia Latina - 2012-present: New shareholders

1 In September, he acquired the shares that belonged to the Winter brothers in a liquidation resulting from a long

judicial process, and immediately afterwards Enfoca Inversiones

exercised a call option to acquire them thus controlling all the

outstanding shares of the company


ICICI Lombard - Specific services

1 ICICI Lombard was amongst the first general insurance companies in India

to engage in telemarketing . However in recent times, public

outburst against pushy and intrusive telecalling in general has led to a reduction in cold calling. Also, the

introduction of 'do-not-call' (opt-out) lists is similar to the US 'Do Not Call Registry'. The firm has a Do Not Call

option.https://store.theartofservice.com/the-call-option-toolkit.html

Intrinsic theory of value

1 # For call options, this is the difference between the underlying

stock's price and the strike price. For put options, it is the difference

between the strike price and the underlying stock's price. In the case

of both puts and calls, if the respective difference value is

negative, the instrinsic value is given as zero.


African Investment Bank - Capital

1 The authorized capital stock shall be divided into paid in capital|paid-in

shares and call option|callable shares


Union Bank of Switzerland - Long-Term Capital Management

1 Union Bank of Switzerland sold LTCM a 7-year option style|European call option on 1million shares in LTCM,

then valued at about US$800million


Ferrovial - History

1 In 2006, a Ferrovial-led consortium purchased the British company BAA Limited, for

£10bn[http://news.bbc.co.uk/2/hi/business/5050626.stm BAA agrees to Ferrovial takeover] and BAA sold its stake in Bristol airport

to Macquarie Airports.[http://uk.reuters.com/article/basicIndustries/idUKL3069721820061201 Ferrovial Sells Bristol Airport Stake to Macquarie] Then in

2007, Ferrovial finalised the sale of its stake in Sydney Airport and MAp exercised its call option on Ferrovial Airports' 20.9% stake in

Sydney Airport for the agreed price of A$1.009 bn.[http://www.ferrovial.com/en/index.asp?

MP=18MS=338MN=2id=1164 Ferrovial sells Sidney airport] Also in 2007 Ferrovial sold Budapest Airport to a consortium led by Hochtief

AirPort GmbH for £1.3bn http://www.ferrovial.com/en/Press-Room/Announcements/BAA-

announces-sale-of-Budapest-Airport-1309-billion and announced changes in its corporate structure


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