adobe theory compatible[1]

8/7/2019 Adobe Theory Compatible[1]

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OPTION PRICINGOPTION PRICINGadobe SYSTEMS INC.adobe SYSTEMS INC.

Olga IvanovaOlga IvanovaAlaina HobbsAlaina HobbsMike TiptonMike Tipton

Adelaide YegoAdelaide YegoYun YunYun Yun


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COMPANY overviewCOMPANY overview

Established in 1982

Founders included: Charles Geschke andJohn Wamock

Headquartered in San Jose California

Operations are conducted in the Americas,Africa, Asia, Europe and the Middle East.


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Industry: Application Software

Trades on Nasdaq: ADBE

Main services offered:Content Authorizing

Online Marketing

Customer Experience Management

Ethical Standards: One of the worlds

most ethical company by Ethisphere


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Adobe is a software design company

Mostly known for it MultimediaPlatform of the name Flash.

Adobe Flash is used to add animationand video on web pages.


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OPTIONS PRICINGOPTIONS PRICING


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Factors of influenceFactors of influence

Changein rice

Strikerice or

K

Time UntilExpiration

Volatility Dividends Risk-Free

rate


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A change in price of the underlying security

Changes in the underlying security price can increaseor decrease the value of an option. These price changes

have opposite effects on calls and puts.

Strike price

The strike price determines whether or not an option

has any intrinsic value. An option's premium (intrinsicvalue plus time value) generally increases as the option

becomes further in the money, and decreases as theoption becomes more deeply out of the money.


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Time until expiration

Generally, as expiration approaches, the levels of anoption's time value, for both puts and calls, decreases or"erodes."

Volatility of the underlying security

Volatility is simply a measure of risk (uncertainty), orvariability of price of an option's underlying security. Highervolatility estimates reflect greater expected fluctuations (ineither direction) in underlying price levels. Generally, option

premiums are higher during periods of volatile futures prices.Because there is increased price risk associated with avolatile market, the cost of obtaining the insurance throughoptions is also greater .



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Dividends and Risk-free interest rate

This effect reflects the "cost of carry" of shares in an

underlying security -- the interest that might be paid for

margin or received from alternative investments (such as a

Treasury bill), and the dividends that would be received

by owning shares outright.



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THE FACTORS THAT INFLUENCETHE FACTORS THAT INFLUENCE

OPTIONS PREMIUMOPTIONS PREMIUM


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CAPITAL STRUCTURE &CAPITAL STRUCTURE &

LEVERAGELEVERAGE

Black- Scholes vs. Geske: while Black- Scholes

model assumes the equitys return volatility is

not dependent on the equity level, Geskes

model implies that the volatility of the equitys

return depends directly on leverage, and isinversely related to the individual stock level.


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EXECUTIVE STOCK OPTIONEXECUTIVE STOCK OPTION

EXERCISEEXERCISE

Adobe awards stock options to its employees in

order to bring forward the interests of the

company and its stockholders by providing an

incentive to attract, retain and reward such

employees by motivating them to contribute to

the growth and profitability of the company.


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foreign EXCHANGEforeign EXCHANGE

OPTION CONTRACTSOPTION CONTRACTS

Maturity dates range from 1 month to 12 months

Yen, British Pound and Euro

As of December 3, 2010, the total value of outstanding

contracts was $1,035.8 millions, including $570.1

millions in Euro, $226.6 millions in Yen and $243.1

millions in other foreign currencies.


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OPTION STRATEGIES ATOPTION STRATEGIES AT

ADOBEADOBE


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OPTIONSOPTIONS

Call- The right to buy an asset at a certainstrike price K

Put- The right to sell an asset at a certainstrike price K

Note that one contract is worth 100 shares


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OPTIONS STRATEGIESOPTIONS STRATEGIES

Bear Bull Butterfly

tra le tra ngle trip

Strap


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BEAR SPREADBEAR SPREAD

Profit from a decrease inProfit from a decrease inthe price of the stockthe price of the stock

Buy a call with strikeBuy a call with strike

price K2 and sell a callprice K2 and sell a callwith strike price K1< K2with strike price K1< K2

Buy a put with strikeBuy a put with strikeprice K2 and sell a putprice K2 and sell a putwith strike price K1< K2with strike price K1< K2

Total Profi t

-10

-5

0

5

10

15

20

25

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46

Total Profi t

General Profit structure


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Bull SPREADBull SPREAD

Profit from an increaseProfit from an increasein the price of thein the price of thestockstock

Buy a call with strikeBuy a call with strikeprice K1 and sell a callprice K1 and sell a callwith strike price K2>with strike price K2>K1K1

Buy a put with strikeBuy a put with strikeprice K1 and sell a putprice K1 and sell a putwith strike price K2>with strike price K2>K1K1

Total Profit

-25

-20

-15

-10

-5

0

5

1 4 7 10131619222528313437 40 434649

Total Profit



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ButterflyButterfly

Profit when the stock priceProfit when the stock priceremains close to theremains close to themiddle strike pricemiddle strike price

Buy a call with strike priceBuy a call with strike price

K1, sell 2 calls with strikeK1, sell 2 calls with strikeprice K2, and buy anotherprice K2, and buy anothercall with strike price K3.call with strike price K3.K1


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StraddleStraddle

Profit from a largeProfit from a largevariation in thevariation in thestock price (positivestock price (positive

or negative)or negative) Buy a call and a putBuy a call and a put

with the same strikewith the same strikeprice K and theprice K and thesame expirationsame expirationdate.date.

Total profit

-5

0

5

10

15

20

25

30

35

1 5 9 13 17 21 25 29 33 37 41 45 49 53

Total Profit



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StrangleStrangle

Profit from a largevariation in the stock

price (positive ornegative). Need

higher shift in pricethan we needed to

profit from a Straddle

Buy a call with strike

price K2, and buy aput with strike priceK1< K2

Total profit

-5

0

5

10

15

20

25

30

35

1 5 9 13 17 21 25 29 33 37 41 45 49 53

Total Profit



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StripStrip

Profit more from aProfit more from a

decrease in Stockdecrease in Stockprice than anprice than an

increase.increase.

Buy one call atBuy one call at

Strike price K andStrike price K andbuy two puts atbuy two puts at

strike price K.strike price K.

Total Profit

-10

0

10

20

30

40

50

60

70

1 5 9 13 17 21 25 29 33 37 41 45 49 53

Total Profit



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StrapStrap

Profit more from anProfit more from an

increase in theincrease in the

stock price than astock price than adecreasedecrease

Buy two calls atBuy two calls atStrike price K andStrike price K and

buy a put at strikebuy a put at strike

price K.price K.

Total Profit

-5

0

5

10

15

20

25

30

35

40

45

1 5 9 13 17 21 25 29 33 37 41 45 49 53

Total Profit



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resultsresults

The options that we used expired on April 15th at aclosing stock price of $34.51

The Butterfly strategy was the most profitable since thestock price did not shift far away from the original stock

price of $34.37


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ARBITRAGE OPPORTUNITIESARBITRAGE OPPORTUNITIES


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Lower/upper boundsLower/upper bounds

Profitable arbitrage opportunities are present ifan option price is above the upper bound or belowthe lower bound.

To calculate the upper and lower bounds of a non-dividend-paying American call option, we use theformula:

max(So-Ke-rt,0) C So

To calculate the upper and lower bounds of a non-dividend-paying American put option, we use theformula:

max(K-So,0) P K


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Lower/upper boundsLower/upper bounds

EXAMPLEEXAMPLE

Call Option: $2.75; So=$34.37; K=$32.00; r=0.78% (1-year LIBOR rate); T=1 month (Expiration May 20, 2011)

Lower Bound:max(So-Ke-rt,0) max(34.37-32e-(0.0078x1/12),0)max($2.58,0)

The lower bound of $2.58 is not violated because the optionis priced at $2.75.

Upper Bound: So $34.37The upper bound is not violated because the option is

priced under the upper bound, which is the stock price, of$34.37.


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PUTPUT--CALL PARITYCALL PARITY

The put-call parity is a formula that shows therelationship in the pricing of call options and putoptions.

The following formula can be used to find the put-callparity on Adobes stock options:

So-K C-P So-Ke-rt.

On the call option examples given above, thecorresponding put options should fall within the pricerange: C+ Ke-rt-So P C+K-So.

Similarly, for the put option examples given above,the corresponding call options should be pricedwithin the range: So-K+P C So- Ke-rt+P.


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PUTPUT--CALL PARITY eXAMPLECALL PARITY eXAMPLE

Call Option: $2.75; So=$34.37; K=$32.00;r=0.78% (1-year LIBOR rate); T=1 month(Expiration May 20, 2011)

The corresponding put option should be pricedwithin the range: C+ Ke-rt-So P C+K-So

$2.75+32.00e-0.0078x(1/12)-34.37 P$2.75+32.00-34.37 $0.17 P $0.38

The current put option is priced at $0.55 whichis outside the range it should be. Therefore, anarbitrage opportunity is present.


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CONCLUSIONCONCLUSION

While arbitrage opportunities are sometimes presentWhile arbitrage opportunities are sometimes presentin the market, the market is usually still efficientin the market, the market is usually still efficientonce transaction costs are taken into consideration.once transaction costs are taken into consideration.

In cases where profitable arbitrage exists even afterIn cases where profitable arbitrage exists even aftertransaction costs are accounted for, arbitragerstransaction costs are accounted for, arbitragersquickly act on these market inefficiencies and thequickly act on these market inefficiencies and thearbitrage opportunities quickly disappear until thearbitrage opportunities quickly disappear until themarket returns to normal.market returns to normal.

adobe theory compatible[1]

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