Description
Terminology of Options, Option Value, Call Value, Put Value, Put Call Parity Theorem
OPTIONS
1. 2. 3. 4. 5. 6. 7. Terminology of Options What is Option Value? Graphic Presentation of Option Values Option Value based Strategies Put – Call Parity Theorem What Determines Option Value? Option Valuation Models
1. Terminology of Options
Comparison of Exercise Price and Market Price
Call Option At the Money E P = M P In the Money E P < M P Out of Money E P > M P
Put Option E P = MP E P > MP E P < MP
2. What is Option Value?…
? The value of an option at expiration is a function of the stock price and the exercise price.
Note: Option Value is like Share Value; it denotes holding value and not profit.
2. What is Option Value?…
? The value of an option at expiration is a function of the stock price and the exercise price. Example - Option values given an exercise price of 55
Stock Price Call Value Put Value
30 0 25
40 0 15
50 0 5
60 5 0
70 15 0
80 25 0
Note: Option Value is like Share Value; it denotes holding value and not profit.
3. Graphic Presentation of Option Values…
Call option value (to buyer) given a 55 exercise price.
Call option value
20
55 Share Price
75
3. Graphic Presentation of Option Values…
Put option value (to buyer) given a 55 exercise price.
Put option value
5 50 55 Share Price
3. Graphic Presentation of Option Values…
Call option payoff (to seller) given a 55 exercise price.
Call option payoff
55 Share Price
3. Graphic Presentation of Option Values…
Put option payoff (to seller) given a 55 exercise price.
Put option payoff
55 Share Price
3. Graphic Presentation of Option Values: Summary Call B u y S e l l Put
4. Option Value based Strategy-1…
Protective Put - Long stock and long put
Long Stock Position Value
Share Price
4. Option Value based Strategy-1…
Protective Put - Long stock and long put
Position Value
Long Put
Share Price
4. Option Value based Strategy-1…
Protective Put - Long stock and long put
Long Stock Position Value Protective Put
Long Put Share Price
4. Option Value based Strategy-1…
FINALLY, Protective Put - Long stock and long put
Position Value
Protective Put
Share Price
4. Option Value based Strategy-2…
Protective call – Fixed return investment and long call Fixed return investment paying 55
Position Value
55
4. Option Value based Strategy-2…
Protective call – Fixed return investment and long call Call option value (to buyer) given a 55 exercise price.
Call option value
Share Price
4. Option Value based Strategy-2…
Protective call – Fixed return investment and long call
Position Value
Protective Call
Fixed return investment
Long Call Share Price
4. Option Value based Strategy-2…
FINALLY, Protective Call - Fixed return investment and long put
Position Value Protective Call
Share Price
5. Put – Call Parity Theorem
The Fundamental Relationship Share Price + Value of Put = P V of Exercise Price + Value of Call Because the payoff of [Buy put, buy share] is identical to [Buy call, Invest PV of Exercise price in safe asset] Thus, Value of Call = Share Price + Value of Put – P V of Exercise Price Value of Put = Value of Call + P V of Exercise Price Share Price
6. What Determines Option Value?
Components of the Option Price (Call Option valuation)
1 Underlying stock price (P) 2 Striking or Exercise price (EX)
Relationship
+ ve - ve
3 Volatility of the stock returns (?)
4 Time to option expiration (t) 5 Time value of money (discount rate)(rf)
+ ve
+ ve + ve
doc_477251366.ppt
Terminology of Options, Option Value, Call Value, Put Value, Put Call Parity Theorem
OPTIONS
1. 2. 3. 4. 5. 6. 7. Terminology of Options What is Option Value? Graphic Presentation of Option Values Option Value based Strategies Put – Call Parity Theorem What Determines Option Value? Option Valuation Models
1. Terminology of Options
Comparison of Exercise Price and Market Price
Call Option At the Money E P = M P In the Money E P < M P Out of Money E P > M P
Put Option E P = MP E P > MP E P < MP
2. What is Option Value?…
? The value of an option at expiration is a function of the stock price and the exercise price.
Note: Option Value is like Share Value; it denotes holding value and not profit.
2. What is Option Value?…
? The value of an option at expiration is a function of the stock price and the exercise price. Example - Option values given an exercise price of 55
Stock Price Call Value Put Value
30 0 25
40 0 15
50 0 5
60 5 0
70 15 0
80 25 0
Note: Option Value is like Share Value; it denotes holding value and not profit.
3. Graphic Presentation of Option Values…
Call option value (to buyer) given a 55 exercise price.
Call option value
20
55 Share Price
75
3. Graphic Presentation of Option Values…
Put option value (to buyer) given a 55 exercise price.
Put option value
5 50 55 Share Price
3. Graphic Presentation of Option Values…
Call option payoff (to seller) given a 55 exercise price.
Call option payoff
55 Share Price
3. Graphic Presentation of Option Values…
Put option payoff (to seller) given a 55 exercise price.
Put option payoff
55 Share Price
3. Graphic Presentation of Option Values: Summary Call B u y S e l l Put
4. Option Value based Strategy-1…
Protective Put - Long stock and long put
Long Stock Position Value
Share Price
4. Option Value based Strategy-1…
Protective Put - Long stock and long put
Position Value
Long Put
Share Price
4. Option Value based Strategy-1…
Protective Put - Long stock and long put
Long Stock Position Value Protective Put
Long Put Share Price
4. Option Value based Strategy-1…
FINALLY, Protective Put - Long stock and long put
Position Value
Protective Put
Share Price
4. Option Value based Strategy-2…
Protective call – Fixed return investment and long call Fixed return investment paying 55
Position Value
55
4. Option Value based Strategy-2…
Protective call – Fixed return investment and long call Call option value (to buyer) given a 55 exercise price.
Call option value
Share Price
4. Option Value based Strategy-2…
Protective call – Fixed return investment and long call
Position Value
Protective Call
Fixed return investment
Long Call Share Price
4. Option Value based Strategy-2…
FINALLY, Protective Call - Fixed return investment and long put
Position Value Protective Call
Share Price
5. Put – Call Parity Theorem
The Fundamental Relationship Share Price + Value of Put = P V of Exercise Price + Value of Call Because the payoff of [Buy put, buy share] is identical to [Buy call, Invest PV of Exercise price in safe asset] Thus, Value of Call = Share Price + Value of Put – P V of Exercise Price Value of Put = Value of Call + P V of Exercise Price Share Price
6. What Determines Option Value?
Components of the Option Price (Call Option valuation)
1 Underlying stock price (P) 2 Striking or Exercise price (EX)
Relationship
+ ve - ve
3 Volatility of the stock returns (?)
4 Time to option expiration (t) 5 Time value of money (discount rate)(rf)
+ ve
+ ve + ve
doc_477251366.ppt