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Chapter 19
An Introduction to Options
Define the FollowingTerms Call Option Put Option Intrinsic Value Exercise (Strike) Price Premium Time Premium
Value of a Call Option
Premium = Intrinsic Value + Time Premium
Intrinsic Value of a Call S - Ex if S > EX or 0 if S <= EX Time premium equals the premium (Market
Price of the the option) less intrinsic value
What factors impact the value of a call option? Time Stock Price Exercise Price Interest Rates Volatility
Profits & losses for the buyer of a call option
o
X
Profits & losses for the seller of a call option
oX
Long Call vs Long Stock
ox
Value of a Put Option
Premium = Intrinsic Value + Time Premium
Intrinsic Value of a Put 0 if S > EX or Ex - S if S <= EX Time premium equals the premium (Market
Price of the the option) less intrinsic value
What factors impact the value of a put option? Time Stock Price Exercise Price Interest Rates Volatility
Profits & losses for the buyer of a put option
o
X
Profits & losses for the seller of a put option
oX
Terminology
Call Option– The buyer of a call option has the right to buy
the underlying asset at a specified price within a specified time period.
– The writer of a call option has the obligation to sell the underlying asset as a specified price within a specified period.
Terminology
Put Option– The buyer of a put option has the right to sell
the underlying asset at a specified price within a specified time period.
– The writer of a put option has the obligation to buy the underlying asset at a specified price within a specified time period.
Protective put option
o
X
Long Put Long Stock
Protective Put Option Net Payoff
oX
Net Payoff
Definitions
Stock index options Leaps Warrants
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