7.1 Mechanics of Options markets Chapter 7 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.1 Mechanics of Options Markets Chapter 7
72 Types of Options A call is an option to buy A put is an option to sell A European option can be exercised only at the end of its life An American option can be exercised at any time Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.2 Types of Options • A call is an option to buy • A put is an option to sell • A European option can be exercised only at the end of its life • An American option can be exercised at any time
73 Assets Underlying Exchange-Traded options Page151-152 Stocks Foreign Currency · Stock| dices Futures Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.3 Assets Underlying Exchange-Traded Options Page 151-152 • Stocks • Foreign Currency • Stock Indices • Futures
74 Specification of Exchange-Traded Options Expiration date Strike price European or American Call or Put(option class) Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.4 Specification of Exchange-Traded Options • Expiration date • Strike price • European or American • Call or Put (option class)
7.5 Terminology Moneyness At-the- money option In-the- money option Out-of-the-money option Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.5 Terminology Moneyness : –At-the-money option –In-the-money option –Out-of-the-money option
7.6 Terminology (continued Option class Option series Intrinsic value Time value Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.6 Terminology (continued) • Option class • Option series • Intrinsic value • Time value
7.7 Dividends stock splits Page154-155) Suppose you own N options with a strike price of K No adjustments are made to the option terms for cash dividends When there is an n-for-m stock split the strike price is reduced to mk/n the no. of options is increased to nN/m Stock dividends are handled in a manner similar to stock splits Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.7 Dividends & Stock Splits (Page 154-155) • Suppose you own N options with a strike price of K : – No adjustments are made to the option terms for cash dividends – When there is an n-for-m stock split, • the strike price is reduced to mK/n • the no. of options is increased to nN/m – Stock dividends are handled in a manner similar to stock splits
78 Dividends stock splits (continued) Consider a call option to buy 100 shares for $20/share How should terms be adjusted for a 2-for-1 stock split? for a 5 stock dividend? Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.8 Dividends & Stock Splits (continued) • Consider a call option to buy 100 shares for $20/share • How should terms be adjusted: – for a 2-for-1 stock split? – for a 5% stock dividend?
7.9 Market makers Most exchanges use market makers to acilitate options trading A market maker quotes both bid and ask prices when requested The market maker does not know whether the individual requesting the quotes wants to buy or sell Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.9 Market Makers • Most exchanges use market makers to facilitate options trading • A market maker quotes both bid and ask prices when requested • The market maker does not know whether the individual requesting the quotes wants to buy or sell
710 Margins(Page 158-159 Margins are required when options are sold When a naked option is written the margin is the greater of 1 Atotal of 100% of the proceeds of the sale plus 20% of the underlying share price less the amount (if any) by which the option is out of the money 2 A total of 100% of the proceeds of the sale plus 10%of the underlying share price For other trading strategies there are special rules Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 7.10 Margins (Page 158-159) • Margins are required when options are sold • When a naked option is written the margin is the greater of: 1 A total of 100% of the proceeds of the sale plus 20% of the underlying share price less the amount (if any) by which the option is out of the money 2 A total of 100% of the proceeds of the sale plus 10% of the underlying share price • For other trading strategies there are special rules
