Chapter 15- Investments
A stock can be replicated by:
- A long call - A short put - A t-bill
Put writer
- Buying at the strike price - Selling contracts for others to sell
3 things that will not change throughout the life of an option
- Identity of the underlying stock - Strike price - Expiration month
A put and call option have the same maturity and strike price. If they also have the same price, which one is in the money?
- Put The stock price must be equal to the present value of the strike price
Options on common stock must stipulate at least the following six contract terms
1. The identity of the underlying stock 2. Strike price 3. Option contract size 4. Option expiration date 5. Exercise style 6. Delivery or settlement procedure
A single call option contract involved an option to buy ____ shares of stock
100
What would replicate a put option
A short option
Stock index option
An option on a stock market index
American options
An option that can be exercised any time before expiration
European options
An option that can be exercised only at expiration
Out of the money
An option that would not yield and positive payoff
In the money
An option with a positive intrinsic value
At the money
Any option with a strike price exactly equal to the underlying price
Call options
Confers to the right, without the obligation, to buy an asset at a given price on or before a given date
Put options
Confers to the right, without the obligation, to sell an asset at a given price on or before a given date
The exchange eliminates
Counterparty risk
You make money if the stock price _____
Declines
Strike price is also called
Exercise price
The seller of a call option receives money
For the right to sell
If interest rates go up, the value of the option:
Goes down
If the underlying stock price is _______ than the strike price, the intrinsic value for a put option is set to zero
Greater
One reason you would buy a put option
If you antcipate the price will decrease
At expiration, the value of an option is equal to:
Intrinsic value because no time is left at expiration
Spread strategy
Involves taking a position on two or more options of the same type at the same time
Before expiration, the value of an option equals:
Its intrinsic value plus its time value
If the underlying stock price is _____ than the strike price, the intrinsic value for a call option is set to zero
Less
What is the intrinsic value of a put option?
Max (0, K-S)
What is the intrinsic value of a call option?
Max (0, S-K)
The _____ time you have, the more valuable the option
More
When you sell a call option that you already own, you keep the ______
Option premium
Strike price
Price specified in an option contract that the holder pays to buy shares
The CDS acts like a protective
Put option
Derivative security
Security whose value is derived from the value of another security
Writer
Seller of an option
Covered call
Selling a call option on stock already owned
Call writer
Selling at strike price if the option is exercised
Call option intrinsic value
Stock price- strike price
Put option intrinsic value
Strike price- stock price
Combination
Takes a mixture of call and put options
A put and a call option have the same maturity and strike price. If both are at the money, which is worth more?
The call is worth more - The call option offers a much bigger potential payoff, since its theoretically unlimited, so its worth more
The breakeven price for a call purchase
The exercise price plus the premium paid - For stock prices higher than this, the purchaser realizes a gain
The greater the standard deviation:
The more valuable the option may be
The seller of a put option receives money for
The obligation to buy
Premium
The price the option trades at
The buyer of a call option pays money for
The right to buy
The buyer of a put option pays money for
The right to sell
The breakeven price for a put purchase
The strike price less the premium
A call option has:
Unlimted potential profit - Put option has limited potential profit
Intrinsic Value
What the option would be worth if it were expiring immediately
Investors can calculate intrinsic value:
Whether the option is dead or alive
One reason you would buy a call option
You expect the price of the asset to increase
At expiration, the time value of an option is ______
Zero