Week 5 Futures and options PDF

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Week 5 – Mechanics of option marketsAn option gives the holder of the option the right to do something, but the holder does not have to exercise this right. By contrast, in a forward or futures contract, the two parties have committed themselves to some action. It costs a trader nothing (except for ...

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We e k5–Me c ha ni c so fo pt i o nma r ke t s Anop t i o ngi v e st h eh o l d e ro ft h eo p t i ont her i g h tt od os o me t h i n g ,bu tt h eho l de rdoe sno tha v et oe x e r c i s et hi s r i g ht .Byc o n t r a s t ,i naf o r wa r do rf u t u r e sc o n t r a c t ,t het wop a r t i e sha v ec o mmi t t e dt h e ms e l v e st os o mea c t i o n .I t c o s t sat r a d e rn o t h i n g( e x c e p tf ort h ema r gi nr e q u i r e me n t s )t oe n t e ri n t oaf o r wa r dorf u t u r e sc o n t r a c t ,whe r e a s t h ep ur c h a s eo fa nop t i o nr e q u i r e sa nupf r o ntpa yme nt . -

Ame r i c a n:c a nb ee x e r c i s e da ta n yt i meupt ot h ee x p i r a t i o nda t e .( mo s to ft h eo pt i on st r a d e d )

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Eur o pe a n:c a nb ee x e r c i s e do n l yo nt h ee x p i r a t i o nd a t ei t s e l f .( e a s i e rt oa n a l y s e )

1 . Ca l lo pt i o ng i v e st h eho l d e ro ft h eo pt i ont h er i g h tt obu ya na s s e tb yac e r t a i nda t ef o rac e r t a i np r i c e I fy o us e c u r es omep r i c ea n da tma t u r i t yt hep r i c ei smu c hhi g h e rt he ny o us e c u r e dt h er i g htt ob u ya tas ma l l e r p r i c et ha nt h ea c t u a lpr i c e . Op p os i t eh a p p e ns :i ft hes t o c kp r i c ei sl o we rt ha nt h es t r i k epr i c e , y o ud o n ’ th a v et oe x e r c i s et h el o s s e s .Be c a u s e t h el o s s e sa r ec a p p e da t0 ,a n dt h eup s i d ei sy o u r s ,t h i sme a nst h a tt h ec o n t r a c twi l lno tb e0v a l u ea ti nc e p t i o n ( a s c o mp a r e d t o f u t u r e s c o nt r a c t )  t h i s c o nt r a c ti s v a l u e d b y t he p u to r c a l lp r i c e .

Su pp o s en o w6 0/ s h a r e .St r i k epr i c e=7 0 /s h a r e .Doe st h ec o n t r a c th a v ea n yv a l u ea ta l l .I ft h es t o c kp r i c et he n g o e sa b o v e70 h a p p yt oh a v et hi sc o n t r a c ta n dt ob u yi ta t7 0wh i l ei ti swo r t hmu c hmo r e .Be f o r ema t u r i t y , t h e ywi l lh a v ev a l uee v e ni ft hes t o c kp r i c ei sb e l o wt hes t r i k epr i c e . Ap u to p t i o ni n c r e a s e si nv a l u ei ft h es t o c kp r i c ei sl o we rt h a nt h es t r i k epr i c eb cwi t hap uto pt i ony o uh a v et he r i f h tt os e l la tKe v e nt h o u g ht h es t o c kpr i c emi gh tb el o we rt h a nK. Ani n v e s t o rwh ob u y saEu r o pe a nc a l lo pt i onwi t has t r i k ep r i c eof$ 1 0 0t op ur c h a s e1 00s ha r e so fac e r t a i n s t o c k.Su pp o s et h a tt h ec u r r e nts t o c kp r i c ei s$ 9 8,t h ee x pi r a t i ond a t eo ft h eo p t i o ni si n4mon t h s ,a n dt hep r i c e o fa nop t i o nt op u r c h a s eo n es h a r ei s$ 5 .+Thei n i t i a li n v e s t me n ti s$5 0 0 Be c a us et heo pt i oni sEu r o pe a n , t hei n v e s t orc a ne x e r c i s eon l yo nt h ee x p i r a t i o nd a t e .I nt h e s ec i r c u ms t a n c e s ,t h e i n v e s t orl o s e st h ewh o l eoft h ei n i t i a li n v e s t me nto f$ 50 0 .I ft hes t o c kp r i c ei sa bo v e$1 0 0ont h ee x p i r a t i ond a t e , t h eo pt i onwi l lb ee x e r c i s e d .Bye x e r c i s i n gt h eo pt i on ,t h ei n v e s t o ri sa b l et ob u y1 00s h a r e sf o r$ 10 0pe rs ha r e . I f t h es h a r e sa r es o l di mme di a t e l y,t h ei n v e s t orma k e sag a i no f$ 15pe rs ha r e ,o r$ 1, 5 0 0,i g no r i n gt r a ns a c t i o n s c o s t s Wh e nt h ei n i t i a l c o s to ft heo p t i o ni st a k e ni n t oa c c o u nt ,t h ene tpr o fitt ot hei nv e s t o ri s$1 , 0 00 .

I ti si mp o r t a ntt or e a l i z et h a ta ni n v e s t ors ome t i me se x e r c i s e sa no pt i o na ndma ke sal o s so v e r a l l .Sup p os et h a t t h es t oc kpr i c ei s$ 1 02a tt h ee x pi r a t i o noft h eo p t i o n .Th ei n v e s t orwou l de x e r c i s et h eo p t i o nc o nt r a c tf orag a i n o f1 0 0x( 1 0210 0) =$2 0 0a n dr e a l i z eal o s so v e r a l lof$3 0 0whe nt h ei n i t i a lc os to ft h eo pt i oni st a k e ni n t o a c c o u nt . I ti st e mpt i n gt oa r g uet h a tt h ei n v e s t o rs h ou l dn o te x e r c i s et h eo p t i o ni nt h e s ec i r c u ms t a n c e s .Ho we v e r ,no t e x e r c i s i n gwo u l dl e a dt oa no v e r a l ll os so f$5 0 0,wh i c hi swo r s et h a nt h e$ 30 0l os swh e nt h ei n v e s t ore x e r c i s e s . I ng e n e r a l ,c a l lo p t i o n ss h ou l dal wa y sbee x e r c i s e da tt h ee xp i r a t i ond a t ei ft hes t oc kpr i c ei sa bo v et hes t r i ke pr i c e . 2 . Putopt i o ngi v e st h eho l d e rt h er i g htt os e l la na s s e tb yac e r t a i nd a t ef orac e r t a i npr i c e .Da t e:ma t u r i t y d a t ea n dt h ep r i c e:s t r i k ep r i c e We r e a st h ep u r c h a s e ro fac a l lo pt i o ni sh o pi n gt h a tt h es t oc kpr i c ewi l li nc r e a s e ,t h ep ur c h a s e ro faputo pt i o n i sh op i n gt h a ti twi l lde c r e a s e . I n v e s t orwhob u y saEu r op e a np u to p t i onwi t has t r i k epr i c eo f7 0 $t os e l l10 0s h a r e so fac e r t a i ns t o c k .Su pp o s e t h a tt hec u r r e n ts t o c kp r i c ei s$ 6 5,t h ee x p i r a t i ond a t eo ft h eo p t i o ni si n3mon t h s ,a n dt hep r i c eo fa nop t i o nt o s e l lon es h a r ei s$7 .+Thei n i t i a li n v e s t me n ti s$7 0 0. Be c a us et h eo p t i o ni sEu r op e a n,i twi l lb ee x e r c i s e do n l yi ft hes t o c kp r i c ei sb e l o w$ 70o nt h ee x p i r a t i o nd a t e . Su pp o s et ha tt h es t o c kpr i c ei s$5 5o nt hi sd a t e . Th ei n v e s t o rc a nbu y1 00s h a r e sf or$5 5p e rs h a r ea n d ,u n d e r t h et e r mso ft hepu to pt i on ,s e l lt hes a mes h a r e sf o r$ 7 0t or e a l i z eag a i nof$ 1 5p e rs h a r e ,o r$ 1 , 5 00( t r a n s a c t i on c o s t si g n o r e d ) Wh e nt h e$7 0 0i n i t i a lc o s to ft h eo pt i oni st a k e ni n t oa c c o un t ,t h ei n v e s t o r ’ sn e tp r ofiti s$ 8 00 .Th e r ei sn o g u a r a nt e et h a tt h ei n v e s t orwi l lma k eag a i n .I ft h efin a ls t o c kp r i c ei sa bo v e$7 0 ,t hepu to pt i one x p i r e s wo r t hl e s s ,a n dt hei n v e s t orl o s e s$ 7 00 .

Thefig u r es h o wst hewa yi nwh i c ht h ei n v e s t o r ’ sp r o fito rl o s so na no p t i o nt os e l lo nes h a r ev a r i e swi t ht he t e r mi n a ls t o c kp r i c ei nt h i se x a mp l e . Ex c ha ng e dt r a de dopt i o nsa r eg e ne r a l l yAme r i c anr a t he rt ha nEur o pe a n=Th ei n v e s t o ri nt hef or e g o i n g e x a mpl e swou l dn o th a v et owa i tun t i lt hee xp i r a t i ond a t eb e f or ee x e r c i s i n gt h eo pt i on Thi nko fopt i o nsasi ns ur a nc e :t h es t o c ki sc u r r e n t l yt r a di n ga t2 0pa n dy o ua r ea f r a i dt h a ts t o c kpr i c ef a l l s b e l o w18a n dt h es t oc kh o l d i n gt h e nl o s e sv a l u e y ouc a nbuyaputo pt i o no nt h es t o c kwi t hs t r i k ep r i c eo f 1 8 .Th i si se q ui v a l e n tofha v i n gp u r c h a s ei n s ur a nc eo nt h ev a l ueo fy o u rs t o c k .

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Opt i o npos i t i o ns

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Si d eoft hel o ngpo s i t i o n( bu y st heo pt i on )

l o ngp os i t i o ni nac a l lop t i o n :p a y o ff=max( S t–K,0 ) l o ngp os i t i o ni naputop t i o n :p a y o ff:max( K–S t , 0 ) -

Sho r tpo s i t i o n( s e l l st heo p t i o n ) .Her e c e i v e sc a s hu pf r o n tb u th a sp o t e n t i a ll i a bi l i t i e sl a t e r .Hi sp r o fit o rl o s si st h er e v e r s eo ft h a tf o rt h epu r c h a s e roft heo p t i o n .

S t–K, 0 )=mi n( K–S t , 0 ) s ho r tpo s i t i o ni nac a l lo pt i on .Pa y off:-max( s ho r tp os i t i o ni naputo p t i o n .Pa y o ff:-max( K–S t ,0 )=mi n( St–K,0)

An yt i mey o ua r ei nt h el i f eoft h eo p t i o n ,y o uc a np u r c h a s et ha ts e c u r i t ya t2 0 $.Th eki n g e ds h a pe :a tt h et i meof ma t ur i t y ,i ft h es t o c kp r i c e >s t r i k e y o uma deap a y o ff. Su pp o s es t o c kpr i c ei s1 5 ,y o uh a v eac o n t r a c tt h a ta l l o wsy out ob u yi tf o r2 0wh e r e a si fy o uj us tg oo nt h es p o t ma r k e t ,y o uc a nb u yi tc h e a pe ra t1 5 ( wi t ho u tt h eop t i o n ) s oy o ud on ’ te x e r c i s et h a to p t i o n . Thep r o fitl i net e l l sy o ut h ep a y o ffy o uma k ef r om t h eo p t i onn e to ft h ec o s ty o up a i df o rt h ec a l l .I tt e l l sy o ut h a t i fy o uwa n n abeb e t t e ro ffwi t ht hi sc on t r a c t ,i ti sn o te no u g ht oa r r i v ea tma t u r i t ya tp r i c eg r e a t e rt ha n20 .I nf a c t y oua r eon l yb e t t e ro ffi ft h epr i c ei sgr e a t e rt h a n21 ( i n t e r s e c t i on )b ca t21y o uma k e1p ou n dbcc o v e r st h ep r i c e o ft h ei n t e r s e c t i on . s ob e t t e ro ffwh e ns t r i k ep r i c e +p r i c eo ft h eo p t i o n .

wh e n0p a y o ff=ou to ft h emo n e y a tt hes t r i k ep r i c e=a tt h emon e y a b o v et h es t r i k ep r i c e =i nt hemon e y . Ap uto p t i o ng o e si nt heo pp o s i t ed i r e c t i onb cg i v e sy o ut her i gh tt os e l li t .Yo ub e n e fitwhe ns t r i k ep r i c ei s15bc y ouh a v et heo p t i o nt os e l li ta t2 0whe nt h ev a l u ei s1 5.So , y oua r eb e t t e ro ff5 $. Thep u to pt i onh a sama xi mu mp a y o ffc a p p e da tp r i c e0b uts h a r e st h ef e a t u r ewi t hc a l lop t i o nt h a ti f Thep r ofitf un c t i ont e l l sy o uy o uo n l yma k ep r o fitn o ti ft h es t o c kp r i c ei sl o we rt h a nt h es t r i k ep r i c ebu ti fi ti s l o we rt h a nt h es t r i k e–t h ep uto p t i o np r i c e .( h e r e1 9 ) .

I fy o ul o n gac a l lo pt i on–y o upu r c h a s et h er i g htt opu r c h a s ea ts omes t r i k ep r i c e As ho r tc a l l–y o uj u s ts ol dt h er i gh tf o rs ome b od yt ob u yf r omy o u . Wh ywo ul da n y b o d ye v e rh ol dac o nt r a c tt h a to n l yg i v e st hed o wn s i d ea n dno n eo ft heu ps i d e .Wh ywo ul d a n y b o d ys e l lac a l lo p t i o n ? Bct he ya r ec ha r g i n gf o rt hep r i v i l e g eo fo n l yh a v i n gt heu ps i d e .Th e ya r ec h a r gi n g t h ec a l lp r i c e>p r ofitl i ne .I ts a y st h a ti ft h ec a l lo p t i oni sn o te x e r c i s e dt h e nt hep e r s onh o l d i n gt h es h o r ts i d e o ft h ec a l lo p t i o nwi l lma k ep o s i t i v emo n e y .Th e ywi l lo n l ys t a r tl o s i n gmon e yi ft h et hes t o c kp r i c e>s t r i k e +c a l l o p t i o n . Th el o s s e sa r eun l i mi t e dwh e ny oua r eh ol d i n gas ho r tc a l l . Buty o us t i l lho l das h o r tc a l lbcon emi gh tt h i n kt ha tas c e na r i oo fun l i mi t e dl o s si su n l i k e l ya n dt h epe r s o n mi gh ta l s obeh o l d i n ga no t he ra s s e tt h a tc a nc e l so fft h i sr i s ks oi fy o ua r ea ni n s u r a n c ec omp a n y As h or tp u ti sami r r o ri ma g eo ft h el o n gp u t .I ft h el o n gpu th o l d st her i g h tt os e l la ts o mep i o i n t .Th es h o r tp ut s e l l st h er i g h tt ob es o l dt oa t as t r i k ep r i c e =2 0. Wh yh o l dan e g a t i v ep a y o ff( c a p pe da t0 )b ct he yc ha r g ey o uf ori t( t h es a mewa yi ns ur a nc ec h a r g ey o uf o rt h e c o n t r a c t )

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Unde r l yi nga s s e t s

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St o c kopt i o ns :Na s d a q-Op t i o n st r a deo nmo r et h a n25 0 0di ffe r e n ts t o c k s .On ec o nt r a c tgi v e st he h o l d e rt her i gh tt ob u yors e l l1 00s h a r e sa tt h es p e c i fie ds t r i k epr i c e .Th i sc on t r a c ts i z ei sc o n v e ni e n t b e c a u s et hes ha r e st h e ms e l v e sa r en o r ma l l yt r a de di nl o t sof1 00 .

St o c k sa r eat y peo fo pt i on . As h a r eo fs t o c ki sac l a i mt oo wn e r s h i po ft hec o mpa n y=e q ui t y .Th ev a l u eoft h i se q u i t yi so n l ypo s i t i v ea s l o n ga st hed e b to ft h ec o mp a n ya r eno tl a r g e rt ha nt h ev a l ueo ft h ec o mp a n y .I fs o ,wha t e v e ri sl e f to ft h ede b t wi l ll e a dt oab a n kr up t c ypr oc e e d i n g .De bt e r sg e tp a i dfir s t( t h e ya r ebo n dh o l d e r s ) Bon d sa r ec l a i mst od e b t .Sot h e r ea r es o mel i mi tf o rt h ev a l uef o rt h ec omp a n yo fh ol d i n gs t o c k s .

Equi t yi ss e e na st h ema x i mu mv a l u eo ft h ev a l u a bl ec o mp a n yV mi n u st h ed e b tBo ft h ec o mp a n y .An y t h i n g a b o v et h a t ,t h es h a r e h o l d e rg e t st ok e e p .An yt h i n gb e l o wt h a t , t hes h a r e h o l d e rl i mi t e dl i a b i l i t y i ft hec o mp a n y g o e sb a nkr u p ta n dt he r ei smo r ed e b tt h a nv a l u eoft hes t o c k ,t h e yc a n n o tc o met og e ty o u rh o us eors t o c ks … I ts t o p sa t0( s t oc ki swo r t h l e s s )a ndgr o wsa bo v et h ed e b t ho l d e r s( t h a ti swh a twec a l le q u i t y) . Thede bti st h emi n i mum o ft h ev a l u eo ft hec o mp a n ya ndt hed e b ti ft hev a l u eoft h ec o mpa n yi sl e s st h a nt h e d e b t , t h e nt h ed e b ti swo r t ht h ev a l u eo ft h ec o mp a n y , no tt h eo r i gi n a lc l a i m=D. t h e s ea r e2a s pe c t so fc o r p or a t el i a b i l i t y . The yl o o kal o tl i k eo pt i on :one q u i t y ,i tl oo k sl i k ef o l d i n gac a l lopt i o no nt hefir m wi t has t r i kepr i c eo fde bt o rhol di ngapr o t e c t i v el e v e r e dput . Fort h ed e b t ,i tl o o ksl i k ey oua r ei s s ui n gap u ts oy o ug e tt h ema x ,y ous ho r tt h ep u to pt i ono nt h ec o mp a n ya nd y ouh a v es o mer i s kl e s sl a n d i n ga s i d e .  - Fo r e i g nc ur r e nc yopt i o ns :Mo s tc u r r e n c yo p t i o n st r a di n gi sn o wi nt h eo v e r t he c o unt e rma r ke t ,b u t t h e r ei ss omee x c h a n g et r a d i n g.Th i se x c ha n g eo ffe r sEur op e a n s t y l ec o n t r a c t so nav a r i e t yo fd i ffe r e n t c u r r e n c i e s . Onec o nt r a c ti st ob u yo rs e l l1 0 , 00 0un i t so faf or e i gnc u r r e n c y

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I nde xopt i o ns :Ma n yd i ffe r e n ti n d e xo p t i on sc u r r e nt l yt r a d et h r o u g ho u tt h ewo r l di nb o t ht heo v e r t he c o unt e rmar k e ta ndt h ee x c ha ng e t r a de dmar ke S&P50 0I nde x ,Do wJ o ne sI nde x .Mo s toft h e c o n t r a c t sa r eEur o pe a n.Ane x c e p t i oni st heOEXc o nt r a c to nt heS&P1 00 ,wh i c hi sAme r i c a n .

On ec o n t r a c ti su s u a l l yt ob u yo rs e l l1 00t i me st hei nde xa tt h es pe c i fie ds t r i k ep r i c e .Se t t l e me nti sa l wa y si n c a s h,r a t he rt h a nb yd e l i v e r i n gt hep or t f ol i ou nd e r l y i n gt h ei n de x.Ex:On ec a l lc o nt r a c to na ni n d e xwi t has t r i k e p r i c eo f98 0 .fi ti se x e r c i s e dwh e nt h ev a l u eo ft h ei nd e xi s99 2 ,t h ewr i t e ro ft hec on t r a c tp a y st h eh o l d e r( 9 9 2– 9 8 0)x1 00=12 0 0$ . -

Fut ur e so pt i o ns :Wh e na ne x c ha n g et r a d e sapa r t i c u l a rf ut u r e sc o nt r a c t , i to f t e na l s ot r a de sopt i o nso n t ha tc o nt r a c t .A f u t ur e sop t i o nn o r ma l l yma t ur e sj us tbe f o r et h ede l i v e r ype r i o di nt h ef u t u r e s c o n t r a c t .

Wh e nac a l lo pt i o ni se x e r c i s e d,t h eh o l d e r ’ sg a i ne qua l st hee x c e s so ft hef ut ur e spr i c eo v e rt hes t r i kepr i c e ( FtSt ) Wh e naputo pt i o ni se x e r c i s e d,t h eh o l d e r ’ sg a i ne qua l st hee x c e s so ft hes t r i kepr i c eo v e rt hef ut ur e spr i c e ( St Ft ) 

Spe c i fic a t i o no fs t o c ko pt i o ns

Ane x c h a n g e dt r a d e ds t o c ko p t i o ni nt h eUSi sa nAme r i c a n s t y l eo p t i onc o n t r a c tt ob u yo rs e l l10 0s h a r e so ft h e s t o c k.

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Expi r a t i o nda t e :Th ep r e c i s ee x pi r a t i o nda t ei st h eSa t u r d a yi mme di a t e l yf o l l o wi n gt h et h i r dFr i d a yo f t h ee xp i r a t i o nmo n t h. Thel a s td a yo nwhi c ho p t i o n st r a dei st het hi r dFr i da yo ft hee x pi r a t i o nmont h.

J a nua r yc y c l ec o n s i s t so ft h emo n t hso fJ a n u a r y ,Apr i l ,J ul y ,a n dOc t o be r .Th eFe br uar yc y c l ec o n s i s t so ft h e mon t h so fFe b r ua r y , Ma y ,Au g u s t ,a n dNo v e mb e r . I ft h ee x p i r a t i o nd a t ef ort h ec u r r e n tmon t hha sno ty e tbe e nr e a c he d,o p t i on st r a d ewi t he x pi r a t i ond a t e si n t h ec u r r e ntmo nt h , t h ef ol l o wi n gmon t h, a n dt hen e xtt womon t hsi nt h ec y c l e . I ft hee xp i r a t i ond a t eoft h ec u r r e n tmo n t hhaspa s s e d,o pt i on st r a dewi t he x p i r a t i o nd a t e si nt hen e xtmo n t h, t h en e x t b u t o nemon t h , a ndt h ene x tt womo nt h so ft hee xp i r a t i o nc y c l e . -

St r i kepr i c e s :Th ee x c h a n g en o r ma l l yc h o os e st h es t r i k ep r i c e sa twhi c ho p t i o n sc a nbewr i t t e ns ot h a t t h e ya r es pa c e d$ 2 . 5 0,$ 5 ,or$1 0a p a r t .Ty p i c a l l yt hes p a c i n gi s$ 2 . 50whe nt hes t o c kp r i c ei sb e t we e n $ 5a nd$2 5 ,$5wh e nt h es t o c kp r i c ei sb e t we e n$2 5a nd$2 0 0,a n d$1 0f o rs t o c kp r i c e sa b o v e$ 20 0 .

Wh e nane we x pi r a t i o nda t ei si n t r o du c e d ,t h e2o r3s t r i k epr i c e sc l o s e s tt ot h ec u r r e n ts t o c kp r i c ea r eu s u a l l y s e l e c t e db yt hee x c h a n g e .I ft h es t o c kpr i c emo v e sou t s i d et h er a n g ed e fin e db yt hehi g h e s ta ndl o we s ts t r i k e p r i c e , t r a di n gi sus ua l l yi n t r o d uc e di na no p t i o nwi t hane ws t r i k ep r i c e . Ex :s t o c kp r i c ei s$ 84whe nt r a d i n gb e gi n si nt h eOc t o b e ro p t i on s .Ca l la n dp u to p t i o n swo ul dpr ob a b l yfir s tb e o ffe r e dwi t hs t r i k ep r i c e so f$8 0 ,$ 8 5,a nd$ 9 0 .I ft hes t o c kp r i c er o s ea b o v e$ 90 ,i ti sl i k e l yt h a tas t r i k ep r i c eo f $ 9 5wo u l dbeo ffe r e d ;i fi tf e l lb e l o w$ 8 0 , i ti sl i k e l yt h a tas t r i k ep r i c eof$7 5wou l db eo ffe r e d ;a nds oon . -

Te r mi nol o g y :Fo ra n ygi v e na s s e ta ta n yg i v e nt i me ,ma n ydi ffe r e n to pt i onc o nt r a c t sma ybet r a d i n g . Co ns i d e ras t o c kt h a th a s4e x pi r a t i onda t e sa n d5s t r i k ep r i c e s .I fc a l la n dpu to p t i o n st r a dewi t he v e r y e x pi r a t i o nd a t ea n de v e r ys t r i k epr i c e , t h e r ea r eat o t a lof40d i ffe r e ntc o n t r a c t s .

Al lo p t i on so ft h es a met y pe( c a l l sorpu t s )a r er e f e r r e dt oa sa nopt i o nc l a s s .Ano pt i o ns e r i e sc on s i s t so fa l lt h e o p t i o n so fag i v e nc l a s swi t ht hes amee x pi r a t i o nda t ea nds t r i kepr i c e .I no t he rwo r d s ,a no pt i ons e r i e sr e f e r s t oap a r t i c ul a rc o nt r a c tt h a t i st r a de d . I fSi st h es t o c kp r i c ea ndKi st hes t r i k ep r i c e ,ac a l lo p t i o ni si nt hemo ne ywhe nS>K,att hemo ne ywhe nS= K, a n do uto ft hemo ne ywhe nSK)t h e nt h ec a l lop t i o ni npo r t f o l i oAwi l l tt i meTpr o v e st obea bo v eK,( Ta b ee x e r c i s e d. Ai swo r t h( St–K)+K =Sta tt i meT. I fStpr o v e st obel e s st ha nK,( STK bo t hpor t f ol i osa r ewo r t hK a tt i meT/i fSt =P–C>=0, 1 8 1 9-20=max ( D+Ke –S ,0 ) 0

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Ea r l ye x e r c i s e :Wh e nd i v i d e nd sa r ee xp e c t e d , wec a nn ol o n g e ra s s e r tt h a ta nAme r i c a nc a l lo pt i onwi l l n o tb ee x e r c i s e de a r l y .So me t i me si ti sop t i ma lt oe x e r c i s ea nAme r i c a nc a l li mme d i a t e l yp r i o rt oa ne x d i v i d e ndd a t e . I ti sne v e ro p t i ma l t oe x e r c i s eac a l la to t h e rt i me s

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Put c a l lpa r i t yComp a r i n gt h ev a l u ea to p t i o nma t ur i t yo ft h er e d e fin e dpo r t f ol i o sAa ndCs h o wst h a t , r T wi t hd i v i d e n ds ,t hep u t –c a l l pa r i t yr e s u l t s c+D+Ke =p+S0

r T Di v i d e n dsc a us ee q u a t i o nt ob emo d i fie d t o –D–K...