Stock Options 101

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Stock Options 101
Lindsay Yoshitomi
Jennifer Jones
Leslie White
Jeff Guba
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Intro to Stock Options
Stock Option?

• Contracts that give you the option to buy or sell
  shares of a particular stock for a set price.
  (You are not obligated to do it!)
• Call Option option allowing holder to buy stock.
• -Put Option option allowing holder to sell stock.

Question to be answered
What is a good value/price for your stock option
on its start date March 21, 2003?
Our Initial Estimate 58.67
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Key Terms
Risk Free Rate- Current T-Bill rate return, on
safe investment.
Strike Price- Pre-specified price at which the
holder of a call can buy the stock or
holder of put can sell stock.
Length of option- the time in which one must wait
to exercise a European Option in which an
investor can purchase shares of particular
stock.
of years to download- the necessary information
needed to research the price of a
particular stock for a certain time period.
Volatility- the amount of change in a specified
stock, increase or decrease.
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Stock Option Profile
Ticker Symbol JNJ
Stock Johnson and Johnson
Strike Price 40
Risk Free Rate 1.20
Length of Option 17 weeks
of Years to Download 12 years
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Annual Risk Free Rate -gt Weekly Rate
-Since we are dealing with the option in terms of
weeks, we need to convert our annual risk-free
rate into a weekly rate.
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Visual Data
Step 1
weekly closing prices ? Ratios

-This continues down the column, but the last
value is zero because there is nothing to divide
it by.
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Step 2
Max, Min, Average, and Range
To compute the Max, Min, Average Range of our
ratios, we used the built-in Excel functions MAX,
MIN, and AVERAGE for the first three calculations
(MAX, MIN, AVERAGE with the cell references).
To find the Range, simply subtract the minimum
from the maximum.
Therefore
MAX 1.185596907 MIN
0.828594313 AVERAGE 1.003545923 RANGE
0.357002594
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Graph of Weekly Closing Price Ratios
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Normalizing Weekly Closing Price Ratios
-Let be a continuous random variable
representing the normalized ratios.
a.) R the ratio
b.)
average of the ratios
c.)
risk-free weekly ratio
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Bar and Line Graph of Normalized Ratios
-The difference between a histogram and the bar
and line graph is that the area under the graph
is the probability.
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Simulation
To create a simulation the following functions
were used to determine the future value of our
stock option
VLOOKUP
I8 VLOOKUP(RANDBETWEEN(1,625),A2D626,4,)
RANDBETWEEN
IF
Start Price
future value
IF( Week 17 closing pricegt40(strike price),week
17-40,0)
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Sample of Simulation Exercise
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Therefore
-We used the FV, to find the value of our teams
stock option on the options start date (PV).
where r is the weekly annual rate
t is the amount of time or weeks

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Conclusion
In conclusion, after running the simulation, the
expected present value of our option on the start
day should be approximately 18.83. This value
is pretty accurate considering that we used 6,000
simulations, average the present values 30 times,
and then averaged the averages.
Even looking at the further exploration, changes
in the risk-free rate and option length dont
make a significant difference.
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Further Exploration
For some further exploration, we considered the
effects of the strike price, the length of the
option, and the risk-free rate.