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Learn the basics of call and put options with practical examples, standardized option characteristics, and a breakdown of IBM stock. Discover how options work and how you can capitalize on market trends effectively.
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Welcome! April 04, 2011
Agenda Few administrative things… Options Intro! (Very Intro) Stock Profile
Officer Transition • In the next few weeks, we will begin transition of officers • Any paid member can apply • Will update but generally: • Submit resume and application • Short interview
Website Finally running at full steam http://ccig.osu.edu
What Options Are • Call options • Put options
Call Options • A call option gives you the right to buy within a specified time period at a specified price • The owner of the option pays a cash premium to the option seller in exchange for the right to buy
Practical Example of A Call Option • Buy a ticket to Ohio State football game • Three options: • Go to the game • Sell it • Let it expire • University wrote the option and gets to keep the premium (ticket cost) no matter which alternate I choose
Put Options • A put option gives you the right to sell within a specified time period at a specified price • It is not necessary to own the asset before acquiring the right to sell it
Standardized Option Characteristics • All exchange-traded options have standardized expiration dates • The Saturday following the third Friday of designated months for most options • Investors typically view the third Friday of the month as the expiration date
Standardized Option Characteristics (cont’d) • The striking price of an option is the predetermined transaction price • In multiples of $2.50 (for stocks priced $25.00 or below) or $5.00 (for stocks priced higher than $25.00) • There is usually at least one striking price above and one below the current stock price
Standardized Option Characteristics (cont’d) • Puts and calls are based on 100 shares of the underlying security • The underlying security is the security that the option gives you the right to buy or sell • It is not possible to buy or sell odd lots of options
The Call • The right to BUY the underlying instrument at a certain price on a specified future date
The Call • The right to BUY the underlying instrument at a certain price on a specified future date • Why? You want to capitalize on an increasing trend in the spot market (bullish). The trend could be either long-term or short-term
The Call • Example: You believe GOOG will rise towards the 500 level in about a month’s time. The spot rate is currently 450. You buy a GOOG Call with a one month expiry and a strike of 450. The price is 10 dollars.
The Call • Example: You believe GOOG will rise towards the 500 level in about a month’s time. The spot rate is currently 450. You buy a GOOG Call with a one month expiry and a strike of 450. The price is 10 dollars. • Upside: Unlimited, and calculated by: • Closing spot price – Strike price - premium = profit
The Call • Example: You believe GOOG will rise towards the 500 level in about a month’s time. The spot rate is currently 450. You buy a GOOG Call with a one month expiry and a strike of 450. The price is 10 dollars. • Upside: Unlimited, and calculated by: • Closing spot price – Strike price - premium = profit • Ex. 480 - 450 - 10 = 20 dollars • Downside: The premium (10 dollars) which will be lost if the option is Out-of-The-Money (OTM) at expiry
The Put • The right to SELL the underlying instrument at a certain price on a specified future date
The Put • The right to SELL the underlying instrument at a certain price on a specified future date • Why? You want to capitalize on a decreasing trend in the spot market (bearish). The trend could be either long-term or short-term
The Put • Example: You believe GOOG will fall towards the 400 level in about a month’s time. The spot rate is currently 450. You buy a GOOG Put with a one month expiry and a strike of 450. The price is 10 dollars.
The Put • Example: You believe GOOG will fall towards the 400 level in about a month’s time. The spot rate is currently 450. You buy GOOG Put with a one month expiry and a strike of 450. The price is 10 dollars. • Upside: Unlimited, and calculated by: • Strike price – closing spot price - premium = profit • Ex. 450 - 400 - 10 = 40 dollars
The Put • Example: You believe GOOG will fall towards the 400 level in about a month’s time. The spot rate is currently 450. You buy GOOG Put with a one month expiry and a strike of 450. The price is 10 dollars. • Upside: Unlimited, and calculated by: • Strike price – closing spot price - premium = profit • Ex. 450 - 400 - 10 = 40 dollars • Downside: The premium (10 dollars) which will be lost if the option is Out-of-The-Money (OTM) at expiry
Stock Pitch International Business Machine
Basic Background Stock Ticker IBM Price: $164.25 Market Cap: ~200 Billion P/E: 14
IBM has transitioned itself Very much used to be hardware, “iron horse” company More of a solutions-oriented company, whether it software, hardware or consulting.
Why IBM? • Stock has risen 12% in 2011 • 28% in the past 12 months. • Big boost from Asia • During fiscal 2010, IBM generated 23% of total sales from the Asia Pacific region. Roughly 42% of sales came from the Americas and 32% came from Europe, the Middle East and Africa. • Sales, net income and earnings per share gained 4.3%, 10% and 16%, respectively, during the past 12 months. • Fourth-quarter net income stretched 9.2% to $5.3 billion and EPS climbed 16% to $4.18, • Boosted by a smaller float
Gross margin steady at 54% Operating margin up from 23% to 24%. $12 billion of cash and $29 billion of debt at the quarter's conclusion, for a quick ratio of 1 and a debt-to-equity ratio of 1.2. Asia Pacific quarterly revenue extended 14% to $6.6 billion, outpacing all other regions. Bottom line: make strides in high margin services and the company is being run like a well oiled machine (no pun intended)
Thanks! • What are your questions?