ACCA_F9 09.ppt

1、,Lecture 09,Understanding Options,Dr Jian Chen The University of Greenwich,Topics Covered,Calls, Puts and Shares Financial Alchemy with Options What Determines Option Values?,Option Terminology,Put Option Right to sell an asset at a specified exercise price on or before the exercise date.,Call Optio

2、n Right to buy an asset at a specified exercise price on or before the exercise date.,Option Obligations,Options,Terminology Derivatives - Any financial instrument that is derived from another. (e.g. options, warrants, futures, swaps, etc.) Option - Gives the holder the right to buy or sell a securi

3、ty at a specified price during a specified period of time. Call Option - The right to buy a security at a specified price within a specified time. Put Option - The right to sell a security at a specified price within a specified time. Option Premium - The price paid for the option, above the price o

4、f the underlying security. Intrinsic Value - Diff between the strike price and the stock price Time Premium - Value of option above the intrinsic value,Options,Terminology Exercise Price - (Striking Price) The price at which you buy or sell the security. Expiration Date - The last date on which the

5、option can be exercised. American Option - Can be exercised at any time prior to and including the expiration date. European Option - Can be exercised only on the expiration date. All options “usually” act like European options because you make more money if you sell the option before expiration (vs

6、. exercising it). 3 vs. 70-68=2,Genentech Stock,Selected prices for puts and calls September 2006,Option Value,The value of an option at expiration is a function of the stock price and the exercise price. Example - Option values given a exercise price of $80,Option Value,Call option value (graphic)

7、given a $80 exercise price.,Share Price,Call option value,80 95,$15,Option Value,Put option value (graphic) given a $80 exercise price.,Share Price,Put option value,70 80,$10,Option Value,Call option payoff (to seller) given a $80 exercise price.,Share Price,Call option $ payoff,80,Option Value,Put

8、option payoff (to seller) given a $80 exercise price.,Share Price,Put option $ payoff,80,Option Value,Call buyer profit assume strike of $80 and option price of $9.00,Share Price,Position Value,Long call,80 89,- 9.00,Break even,Option Value,Put seller profit assume strike of $80 and option price of

9、$4.60,Share Price,Position Value,Short put,75.40 80,+4.60,Break even,Option Value,Components of the Option Price 1 - Underlying stock price = Ps 2 - Striking or Exercise price = S 3 - Volatility of the stock returns (standard deviation of annual returns) = v 4 - Time to option expiration = t = days/

10、365 5 - Time value of money (discount rate) = r 6 - PV of Dividends = D = (div)e-rt,Time Decay Chart,Option Price,Stock Price,Option prices decline, ceribus paribus, when the time to expiration declines.,90 days to expiration,60 days to expiration,30 days to expiration,Option Value,Upper Limit,Stock

11、 Price,Lower Limit,(Stock price - exercise price) or 0 which ever is higher,Option Value,The value of an option is bound, on the high end, by the value of the underlying stock. The lower bound is the value of exercising the option. In between, the major determinants are exercise price and stock pric

12、e.,Option Value,Components of the Option Price 1 - Underlying stock price 2 - Striking or Exercise price 3 - Volatility of the stock returns (standard deviation of annual returns) 4 - Time to option expiration 5 - Time value of money (discount rate),Option Value,Black-Scholes Option Pricing Model,OC

13、- Call Option Price P - Stock Price N(d1) - Cumulative normal density function of (d1) PV(EX) - Present Value of Strike or Exercise price N(d2) - Cumulative normal density function of (d2) r - discount rate (90 day comm paper rate or risk free rate) t - time to maturity of option (as % of year) v -

14、volatility - annualized standard deviation of daily returns,Black-Scholes Option Pricing Model,Black-Scholes Option Pricing Model,N(d1)=,Black-Scholes Option Pricing Model,Cumulative Normal Density Function,Call Option,Example - Genentech What is the price of a call option given the following? P = 8

15、0r = 5%v = .4068 EX = 80t = 180 days / 365,Call Option,Example - Genentech What is the price of a call option given the following? P = 80r = 5%v = .4068 EX = 80t = 180 days / 365,Call Option,Example - Genentech What is the price of a call option given the following? P = 80r = 5%v = .4068 EX = 80t =

16、180 days / 365,Call Option,Example What is the price of a call option given the following? P = 36r = 10%v = .40 EX = 40t = 90 days / 365,Call Option,Example What is the price of a call option given the following? P = 36r = 10%v = .40 EX = 40t = 90 days / 365,Call Option,Example What is the price of a call option given the following? P = 36r = 10%v = .40 EX = 40t = 90 days / 365,Put - Call Parity,Put Price = Oc + EX - P - Carrying Cost + Div.,Carrying cost = r x EX x t,Put - Call Parity,Ex