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Good Afternoon 9/15

Good Afternoon 9/15. HW # 1 Posted – due Thursday, 9/22. We will also have a big quiz (on 9/22) – a double quiz – so after next Thursday, we will have three quiz / HW grades!

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Good Afternoon 9/15

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  1. Good Afternoon 9/15 • HW # 1 Posted – due Thursday, 9/22. We will also have a big quiz (on 9/22) – a double quiz – so after next Thursday, we will have three quiz / HW grades! • Today – do exercise from last week on the goog 310 put, finish options; writing options, a zero sum game, and a profit loss function to see what is going on! • Introduce the futures market. • New posting – very important if you did not get hold of a guide to money and investing (warning, it’s a big pdf file) • Also, another posting, reading the stock pages and what is a PE ratio? An example.

  2. Reading assignment - • Please read chapters 7 and 13

  3. But first, a couple pictures • Look for a bubble bursting????

  4. The Dow since 1995

  5. The components of the DOW Jones industrials • Click Here for the components and Here for dogs of Dow

  6. The Nasdaq

  7. Do example with put from last week

  8. Now draw a profit – loss function for a randomly selected option (from BBY) – be sure to stress that we are only evaluating the profit / loss at expiration

  9. Writing calls: puts • When you write and option, you are giving someone the right to exercise the option that you write. • For example, suppose you own 100 shares of IBM stock and you are bearish. • You could write one call (say a 110 call) and sell it to someone – say for $50 • If IBM never gets to $110, you simply keep the money (the premium). • If IBM does get “in the money,” say to $115, then you must honor the call you sold and sell 100 shares at $______ • You are not happy – discuss difference between covered and naked calls (naked is more risky).

  10. Zero Sum game • Show on overhead

  11. Example of writing a put (bullish) • IBM spot is $100 as before – write one 90 put and sell for $50. If IBM never gets below $90, you simply keep the $50 premium. • Suppose IBM goes to $85 and option is exercised. You must buy 100 shares at $___ • Difference between naked and covered put • A covered put is when you have established a short position on IBM

  12. Zero sum game • Show on overhead

  13. Now discuss options as a form of compensation • What’s the idea? • What’s the (possible) problem?

  14. Back to stock price determination • Write down example on overhead • State assumption • Expectations of three successive years of profits: $ 5000, $12,000, $14,000 • Expectations of 1 year interest rates: 3.5%, 5%, 5% • Calculate PV of firm • Assume 1000 shares outstanding – what is the price of stock? • What is the PE ratio? • See worksheet

  15. Introduce futures • The wheat farmer and the bread maker – go to problem on web

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