CHAPTER 8. OPTIONS DERIVATIVES. Learning Objectives. Describe what is an option and difference from futures Describe the difference between ETO and OTC options Explain the uses of options Explain the differences between call option and put option
Right to sell an asset at a specified exercise price on or before the exercise date.
Time Value (TV) – Even if the option has zero IV, it will still have some value because the option is yet to expire. TV is the value that arises from the probability that an option will become profitable before its expiry date. TV is always positive before maturity. The longer the time to expiry, the higher the TV. TV reduces when the option approaches maturity. At maturity, TV = zero
Suppose you bought ABC September RM9 call option for RM0.50. The ABC stock is currently traded at RM15. Give the following details for this option:
Suppose you bought ABC September RM9 put option for RM0.50. The ABC stock is currently traded at RM15. Give the following details for this option:
E.g. call option is in-the-money if:
Strike price < market price
Put option is in-the-money if:
Strike price > market price
If Strike price = Market price
Call option – If strike price > market price
Put option – If strike price < market price
State which option is in-, at- or out-of the money if the price of ABC stock is RM5, and the current index level is 1175.