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Option Trading
April 19, 2009
(http://www.investopedia.com/university/options/default.asp)
- Options
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.
- Calls and Puts
A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.
A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.
The total cost (the price) of an option is called the premium (including the stock price, strike price, time remaining until expiration (time value) and volatility).
CALL的持有者因为有权在一定时期购买某一特定价位的股票，他当然希望股票在满期
日前股票增长，所以CALL就类似股票上的LONG POSITION。
PUT的持有者因为有权在一定时期内卖出某一特定价位的股票，他当然希望股票下跌，
所以PUT就类似股票上的SHORT POSITION。
PUT和CALL都有他们各自的WRITER。他们都要履行期权义务。CALL期权的WRITER就处
在SHORT POSITION。反过来，PUT期权的WRITER就处在LONG POSITION。
- Example
Given:
Ø a stock price is $67 on May 1.
Ø Premium(cost) is $3.15 for a July 70 Call, which means strike price is $70, expiration date is the 3 rd Friday of July.
Ø 100 share
Solution:
From the given conditions we know:
1. Total price of the contract is $3.15x100=$315.(option price)
2. Break-even price would be $73.15
3. When the stock price is $67, less than the $70 strike price, the option is worthless on May 1.
Suppose three weeks later, the stock price is $78, May 21. The option contract is now worth $8.25, that is
Preminum($8.25) = Intrinsic value($8) + time value($0.25)
Profit is ($8.25-$3.15)x100=$510
Sell your options, which is called “ closing your position ”.
Date | May 1 | May 21 |
Stock price | $67 | $78 |
Option price | $3.15 | $8.25 |
Contract value | $315 | $825 |
Paper Gain/loss | 0 | $510 |
Suppose the stock price is $62 on expiry date.
Date | May 1 | 3rd Friday of July |
Stock price | $67 | $62 |
Option price | $3.15 | Worthless |
Contract value | $315 | 0 |
Paper Gain/loss | 0 | -$315 |
- Option table
Column 1: Strike Price - This is the stated price per share for which an underlying stock may be purchased (for a call) or sold (for a put) upon the exercise of the option contract. Option strike prices typically move by increments of $2.50 or $5 (even though in the above example it moves in $2 increments).
Column 2: Expiry Date - This shows the termination date of an option contract. Remember that U.S.-listed options expire on the third Friday of the expiry month.
Column 3: Call or Put - This column refers to whether the option is a call (C) or put (P).
Column 4: Volume - This indicates the total number of options contracts traded for the day. The total volume of all contracts is listed at the bottom of each table.
Column 5: Bid - This indicates the price someone is willing to pay for the options contract.
Column 6: Ask - This indicates the price at which someone is willing to sell an options contract.
Column 7: Open Interest - Open interest is the number of options contracts that are open; these are contracts that have neither expired nor been exercised.
