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Chapter 23 Options-Basic Concepts And Strategies

Chapter 23 Options-Basic Concepts And Strategies. Limitations Of Option Trading. Lack of Standard Contracts Lack of Transferability Between Investors Have to Take Physical Delivery Risk Associated With Lack of Collateral Lack of Market Maker. Chicago Board Options Exchange (CBOE).

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Chapter 23 Options-Basic Concepts And Strategies

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  1. Chapter 23Options-Basic ConceptsAnd Strategies

  2. Limitations Of Option Trading • Lack of Standard Contracts • Lack of Transferability Between Investors • Have to Take Physical Delivery • Risk Associated With Lack of Collateral • Lack of Market Maker

  3. Chicago Board Options Exchange (CBOE) • Began 1973 • Addresses Limitations • Explosive Growth

  4. Option Terminology • Exercising the Option Contract • Strike Price/Exercise Price • Long Position • Option Writers • Short Position

  5. Option Contract • European-Style Option • Exercised only on specific date • American-Style Option • Exercise anytime

  6. Options Versus Stocks • Options • Low-cost for taking a position • Limit loss to purchase price • Optimist • Buys call option • Pessimist • Buys put option

  7. Asset Between Relationship Option In-the-money option Out-of-the-money option At-the-money option Naked option Covered option

  8. Option Clearing Corporation (OCC) • Maintains Records of Trades • Facilitates • Validation • Delivery • Settlement • Owned by Exchanges CBOE AMEX NYSE PHLX • Issues All Option Contracts • Guarantees Both Sides

  9. Option Values • Intrinsic Value • Immediately exercised • Time Value • Current value above intrinsic value

  10. Payoff Diagrams • Illustrate • The value line • The P/L line • Both

  11. $ Value and Profit or Loss Value Line Stock Price at Expiration P/L Line

  12. Investment Strategies Using Options • Protective Put Buying • Put option and stock • Sets a floor for losses • Covered Call Writing • Call option and stock • Sets a ceiling on the potential gain • Receives the call premium • Bull Spread • Allow investors to profit if prices rise • Limits investors’ losses if prices fall • Price will rise by small amount

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