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Chapter 14

CFIN501- Chapter 14- Options.docx

7 Pages

Course Code
FIN 501
Edward Blinder

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CFIN501 Chapter 14 OptionsOptions On Common StockOption BasicsDerivative securitysecurity whose values is derived from the value of another securityoOptions are a type of derivative securityCall optionon common stock grants the holder the right but not the obligation to buy the underlying stock at a given strike pricePut option on common stock grants the holder the right but not the obligation to sell the underlying stock at a given strike priceStrike priceprice specified in an option contract that the holder pays to buy shares in the case of call options or receives to sell shares in the case of put options if the option is exercisedoAlso called the exercise priceOptions are contracts and in practice option contracts are standardized to facilitate convenience in trading and price reportingStandardized stock options have a contract size of 100 shares of common stock per option contractOptions on common stock must stipulate at least the following six contract terms1Identity of the underlying stock2Strike pricestriking exercise price3Option contract size4Option expiration dateoption maturity5Option exercise styleAmerican optionoption that can be exercised any time before expirationEuropean optionoption that can be exercised only on the last day before expiration6Delivery or settlement procedureOption exchange is a marketplace where customer buy orders and sell orders are matched up with each otherStock options are traded in financial markets in a manner similar to the way that common stocks are tradedOption Price QuotesCurrent prices for relatively small number of stock options traded at the major options exchanges are reported each day in major journalsOptions prices are stated on a per share basisactual price of an option contract is 100 times the pershare priceoEach option contract represents on option on 100 shares of stockOption chainA list of available option contracts and their prices for a particular security arrayed by strike price and maturityStock option ticker symbolsStock optionidentifies not only the underlying stock but also option type expiration date and the strike price2010options clearing corporation instituted a new expanded approach for option symbolsFormer symbolsoTwo partsthree letter symbol for the underlying and two letter symbol specifying the option typeoSpecifying the option type put or call expiration month strike priceCurrent symbolsoHelps alleviate issuesoTrade offis that they symbol will increase from 5 letters to a combination of about 20 letters and numbersoProvides same information underlying security expiration date option type and strike priceoExpansion form allows investors to specify the actual symbol of the underlying securitybroader range of strike pricesThe Options Clearing CorporationOption traders who transact on option exchanges have an important allyOptions clearing corporation OCCprivate agency that guarantees that the terms of an option contract will be fulfilled if the option is exercisedoIssues and clears all option contracts trading on US exchanges1
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