Scribd Logo
Upload

Welcome to Scribd!

  • 45 views

    Properties of Stock Options: Steven Skiena

    Uploaded by

    Brian Takata
    This document discusses various types of stock options: - American options can be exercised anytime before expiration, while European options can only be exercised at expiration - Employee stock options are used for recruitment and retention of employees - The value of a call option is at least the difference between the stock price and strike price - The long position is held by the option buyer, while the short position is held by the option seller - Options can be used for hedging, speculation, or arbitrage strategies - Options provide leverage, as you can control a large number of shares for a smaller investment amount compared to buying the stock outright

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    Properties of Stock Options: Steven Skiena

    Uploaded by

    Brian Takata
    45 views12 pages
    This document discusses various types of stock options: - American options can be exercised anytime before expiration, while European options can only be exercised at expiration - Employee stock options are used for recruitment and retention of employees - The value of a call option is at least the difference between the stock price and strike price - The long position is held by the option buyer, while the short position is held by the option seller - Options can be used for hedging, speculation, or arbitrage strategies - Options provide leverage, as you can control a large number of shares for a smaller investment amount compared to buying the stock outright

    Original Description:

    cxcx

    Original Title

    Lecture 5

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses various types of stock options: - American options can be exercised anytime before expiration, while European options can only be exercised at expiration - Employee stock options are used for recruitment and retention of employees - The value of a call option is at least the difference between the stock price and strike price - The long position is held by the option buyer, while the short position is held by the option seller - Options can be used for hedging, speculation, or arbitrage strategies - Options provide leverage, as you can control a large number of shares for a smaller investment amount compared to buying the stock outright

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    45 views12 pages

    Properties of Stock Options: Steven Skiena

    Uploaded by

    Brian Takata
    This document discusses various types of stock options: - American options can be exercised anytime before expiration, while European options can only be exercised at expiration - Employee stock options are used for recruitment and retention of employees - The value of a call option is at least the difference between the stock price and strike price - The long position is held by the option buyer, while the short position is held by the option seller - Options can be used for hedging, speculation, or arbitrage strategies - Options provide leverage, as you can control a large number of shares for a smaller investment amount compared to buying the stock outright

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 12

    Lecture 5: Properties of Stock Options Steven Skiena Department of Computer Science State University of New York Stony Brook,

    NY 117944400 http://www.cs.sunysb.edu/skiena

    Types of Options
    American options can be exercised anytime prior to the expiration date European options can only be executed on the expiration date. Which are more valuable, American or European options? Most exchange-traded options are American, but the value of European options is easier to determine. Employee stock options are used to aid in recruitment and retention of employees. Making them exchange tradeable (as Google has done) makes them more valuable.

    What is an Option Worth?


    Suppose you own an unexpired call option to buy a stock for $100. What is your option worth if the stock is selling for $110? At least $10. It is better to own cash and an option to buy at the current price than to own the shares! What if the stock is selling for $90? The value of an option cannot be less than 0, since you can choose not to execute it.

    Long vs. Short


    The long position in a security is held by the buyer of the security, be it a stock share, a put, or a call. The short position in a security is held by the seller of the security, be it a stock share, a put, or a call. The seller of an option makes a prot by having sales prices exceed losses. The nomiclature can get confusing. . .

    Call Option Prots

    Put Option Prots

    Uses of Options
    Hedgers can use options to reduce risk. They can reduce the risk that a stock they own will decline by buying put options on it. Speculators can use options to gamble that prices will change. They can buy a put option on a stock if they think it will go down. Arbitragers can use options to gain risk-less prots if securities are inconsistently priced.

    Options Provide Action!


    Options provide more impact per dollar than holding the underlying securities. Suppose IBM has a current spot price of $90 per share. Further, call options with a strike price of $90 and three month expiration are available for $5 per share To invest in 100 shares of IBM for three months, I could: Buy $90 100 = $9, 000 of shares, or Buy $5 100 = $500 of options.

    Three Months Later

    Options are risky investiments which hold out the possiblity of high returns. The worst that can happen when you own options is that you lose everything, as they cannot get negative.

    Portfolios with Options


    The raw materials of investments we have include borrowing/depositing money, buying/selling options, and buying/selling stocks. Combinations of options and stocks can be used in clever ways to engineer portfolios exploiting certain opportunities and eliminating particular risks. By combining put and call options, we can place bets which payoff under a variety of different market conditions.

    The Covered Call


    I own Google stock, current spot price $500 per share. If I write (sell) a call option at $600, I get some guaranteed income, but lose some potential prots (if it goes above the strike price).

    Single Option, Single Stock

    (a) long stock, short call (b) short stock, long call (c) long stock, long put (d) short stock, short put Adding an option protects me if I am long or short on a stock.

    You might also like