Options- quantitative finance approach, Esquemas y mapas conceptuales de Finanzas

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Options 1

IN THIS CHAPTER Discovering a variety of options

Interpreting trade data

Paying attention to expiration dates

Putting knowledge to practice

Balancing puts and calls

Exploring Options

E

Examining a Variety of Options

» Callable bond:^ A bond in which the issuer has the option of calling in the bond and giving the investors their money back if the interest payments become large compared with current market rates. Nice for the issuer of the

for a bond because she isn’t guaranteed to receive the attractive interest rate

» Convertible bond:^ This type of bond gives the holder the right to convert it into the equity of the issuing company.

has a

» A^ call option^ gives the holder the right, but not the obligation, to buy a

» A^ put option^ gives the holder the right, but not the obligation, to sell a

Reading Financial Data

Seeing your strike price

or sometimes or is the

Most options are

Tesco put, call and strike prices in November 2014. Source: Intercontinental Exchange (ICE)

Abbreviating trading information

» Settl. (settlement):^ The price at the close of business on the previous

» O.I. (open interest):

» Day vol (daily volume):^ The trading volume indicating how many option

with trading volume because only with trades can prices truly be discovered.

» Ask:^ The amount it costs to buy a contract. » Bid:^ The amount you can sell a contract for.

Valuing time

share price. © John Wiley & Sons, Ltd

on share price.

© John Wiley & Sons, Ltd

Using Options in Practice

Hedging your risk

» A investment.

» Risk a more elaborate discussion about risk.)

So -

Writing options

a

Earning income from options

for short call (a) and short put (b) positions

© John Wiley & Sons, Ltd

» Portfolio A:^ A European call option and cash to the value of Xe^ where X is the strike price.

» Portfolio B:^ A European put option plus one share.