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Comprehensive Overview of Options: Calls, Puts, and Key Concepts

This lecture provides an in-depth understanding of options, including calls and puts. An option grants the holder the right to buy (call) or sell (put) a security at a specified price during a defined timeframe. Key terms covered include option premium, intrinsic value, time premium, exercise price, and expiration date. We also explore American and European options, along with the mechanics of charting options for profit and loss analysis. Gain foundational knowledge crucial for engaging in derivative trading.

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Comprehensive Overview of Options: Calls, Puts, and Key Concepts

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Presentation Transcript

  1. Derivatives Lecture 2

  2. Option Overview

  3. Options • Option - Gives the holder the right to buy or sell a security at a specified price during a specified period of time. • Call Option - The right to buy a security at a specified price within a specified time. • Put Option - The right to sell a security at a specified price within a specified time. • Option Premium - The price paid for the option, above the price of the underlying security. • Intrinsic Value - Diff between the strike price and the stock price • Time Premium - Value of option above the intrinsic value • Exercise Price - (Striking Price) The price at which you buy or sell the security. • Expiration Date - The last date on which the option can be exercised.

  4. Option Value Price 0 30 60 90 (expiration) Time (days)

  5. Option Contract Ends by … • Expiration • Exercise • Sales • American option • European option

  6. Options Intrinsic Value = P - E Premium = Option price Time Premium = O + E – P Warrants Convertible Bonds

  7. Charting Options Profit Loss Asset Price

  8. Charting Options – Long Call Profit Loss Asset Price

  9. Charting Options – Short Call Profit Loss Asset Price

  10. Charting Options – Long Put Profit Loss Asset Price

  11. Charting Options – Short Put Profit Loss Asset Price

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