ch 09 hull fundamentals 8 the d

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 9, Copyright John C. Hull !"#

Mechanics of OptionsMarkets

Chapter 9

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Types of Options

A call is an option to buyA put is an option to sell

A European option can be exercised onlyat the end of its life

An American option can be exercised at

any time

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Option Positions

Long callLong put

Short callShort put

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Long Call(Figure 9.1, Page 212

Profit from buying one European call option: option price= $! stri"e price = $#%

&

'

#

(

) * 9 #

## #' #&

Profit +$,

-erminalstoc" price +$,

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!hort Call(Figure 9.", page 21"

Profit from .riting one European call option: option price= $! stri"e price = $#

(&

('

(#

) * 9 #

## #' #&

Profit +$,


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Long Put(Figure 9.2, page 21"

Profit from buying a European put option: option price =$)! stri"e price = $)

&

'

#

())/0 * 9 #

Profit +$,

-erminal

stoc" price +$,

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!hort Put(Figure 9.#, page 21#

Profit from .riting a European put option: option price =$)! stri"e price = $)

(&

('

(#

)

)

/0

* 9 #

Profit +$,


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Payoffs fro$ Options1hat is the 2ption Position in Each Case3

K= Stri"e price! ST= Price of asset at maturity

Payoff Payoff

ST

ST

K

K

Payoff Payoff

ST

ST

K

K

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%ssets &n'erlying

)change*Tra'e' OptionsPage 21+*21

Stoc"s4oreign CurrencyStoc" 5ndices

4utures

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!pecification of

)change*Tra'e' Options

Expiration dateStri"e priceEuropean or AmericanCall or Put +option class,

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Ter$inology

6oneyness :At(the(money option

5n(the(money option2ut(of(the(money option

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Ter$inology(continue'

2ption class2ption series5ntrinsic 7alue-ime 7alue

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-ii'en's / !tock !plits(Page 219*220

Suppose you o.n options .ith a stri"e priceof Kto buy +or sell, Nshares: 8o adustments are made to the option

terms for cash di7idends 1hen there is an n(for(mstoc" split!

the stri"e price is reduced to mK/n the no% of shares that can be bought +or

sold, is increased to nN/m Stoc" di7idends are handled in a manner

similar to stoc" splits

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-ii'en's / !tock !plits(continue'

Consider a call option to buy #shares for $' per share

o. should terms be adusted: for a '(for(# stoc" split3 for a ; stoc" di7idend3

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Market Makers

6ost exchanges use mar"et ma"ers tofacilitate options trading

A mar"et ma"er


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Margin (Page 222*22#

6argin is re


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arrants

1arrants are options that are issuedby a corporation or a financialinstitution

-he number of .arrants outstandingis determined by the si>e of theoriginal issue and changes only.hen they are exercised or .henthey expire

Fundamentals of Futures and Options Markets, 8th Ed, Ch 9, Copyright John C. Hull !"#17


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arrants(continue'

-he issuer settles up .ith the holder.hen a .arrant is exercised

1hen call .arrants are issued by acorporation on its o.n stoc"!exercise .ill usually lead to ne.treasury stoc" being issued



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$ployee !tock Options(see also Chapter 1#

Employee stoc" options are a form ofremuneration issued by a company to itsexecuti7es

-hey are usually at the money .hen issued 1hen options are exercised the company issues

more stoc" and sells it to the option holder for

the stri"e price Expensed on the income statement



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Conertile 3on's

Con7ertible bonds are regular bondsthat can be exchanged for e


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arrants

1arrants are options that are issued +or.ritten, by a corporation or a financial

institution-he number of .arrants outstanding is

determined by the si>e of the original

issue ? changes only .hen they areexercised or .hen they expire

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arrants(continue'

1arrants are traded in the same .ay asstoc"s

-he issuer settles up .ith the holder.hen a .arrant is exercised1hen call .arrants are issued by a

corporation on its o.n stoc"! exercise.ill lead to ne. treasury stoc" beingissued

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)ecutie !tock Options

2ption issued by a company to executi7es1hen the option is exercised the company

issues more stoc"sually at(the(money .hen issued

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Conertile 3on's

Con7ertible bonds are regular bonds

that can be exchanged for e


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Conertile 3on's(continue'

@ery often a con7ertible is callable-he call pro7ision is a .ay in .hich the

issuer can force con7ersion at a timeearlier than the holder might other.isechoose

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ch 09 hull fundamentals 8 the d

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