COMMERCE 3FA3 Study Guide - Final Guide: Zero-Coupon Bond, Common Stock, Opportunity Cost
5 Jun 2018
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The Basics of Options
Exercising is the act of buying or selling the underlying asset via option contract
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Strike/exercise price is the fixed price in the contract where the holder can buy or sell the underlying asset
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Expiration date is the last day an option can be exercised
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American options are call or put options that can be exercised on or before the expiration date
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European options can only be exercised on the expiration date
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Call options give the right to buy a stock at a fixed price during a particular time period
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Option buyers are holder who pay for call contracts, while option sellers are writers
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Put options give the right to sell a stock at fixed price during a particular time period
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Derivatives are any asset that derive value from another asset. Options are contracts giving owners the right to buy or
sell an asset at a fixed price on or before a date.
Zero-sum game - whatever the buyer makes, the seller loses, and vice versa
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Historically, of options expire worthless and the writer suffers significant losses
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Option Payoff
Option Valuation
If intrinsic value is greater than zero, it is "in the money"
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If intrinsic value equals zero, it is "out of the money"
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Upper bound at and intrinsic value/lower bound at , its worth before expiry
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Option delta is the
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Black-Scholes model calculates value of European option/employee options
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when
when
= stock price at expiration
= value of call option on expiration date (in one period)
= exercise price
= stock price today
= value of call option today
= present value of exercise price
Time value is the future potential gain and is always non-negative
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Intrinsic value is the gain on exercising today
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In the ST stock price decreases or remains the same, in the LT it increases
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Covered call occurs when a trader buys/already owns a stock and sells call options for the same amount or less,
then waits for the options contract to be exercised or expire
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Protective put occurs when a trader owns stock and buys a put option for same number of shares to protect
unrealized gains on shares from a previous purchase
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Options Strategies
Factor affecting value
Variable
Call value
Put value
Stock price increase
Exercise price increase
Time to expiry increase
Volatility of stock price increase/
variance of return on underlying asset
/
Fiskfree rate increase
Employee Stock Options
Typically have ten-year life, longer than typical options and cannot be sold
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"Vesting" period of 3 years where ESO cannot be exercised and must be forfeited if employee leaves
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ESOs are granted to employees by a company as a call option for company stock.
Options and Corporate Securities
March 30, 2018
3:27 PM
Managerial Finance Page 1
Document Summary
Derivatives are any asset that derive value from another asset. Options are contracts giving owners the right to buy or sell an asset at a fixed price on or before a date. Exercising is the act of buying or selling the underlying asset via option contract. Strike/exercise price is the fixed price in the contract where the holder can buy or sell the underlying asset. Expiration date is the last day an option can be exercised. American options are call or put options that can be exercised on or before the expiration date. European options can only be exercised on the expiration date. Call options give the right to buy a stock at a fixed price during a particular time period. Put options give the right to sell a stock at fixed price during a particular time period. Option buyers are holder who pay for call contracts, while option sellers are writers.
