A Basic Options Review

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A Basic Options Review
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Options

• Right to Buy/Sell a specified asset at a known
  price on or before a specified date.
• Call Option - Right to buy
• Put Option - Right to sell
• When Option Bought/Sold, Premium is exchanged.

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Option Specifications

• Current Price of Specified Asset - S(S as we
  consider options on stocks first)
• Specified Price of Buy/Sell - X(or Strike Price,
  so some use K)
• Last time to Buy/Sell Expiry ( T ) (or
  Expiration date)
• Note There will be other factors when we
  actually start calculating prices, but for now we
  will take all market prices as given.

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Basic Option Payoffs Call Option
Out of the Money
In the Money
Payoff
Payoff
Price
Price
Current Stock Price
Option Exercise Price
Stock Payoffs
Call Option Payoffs
Call Option Payoff Max 0 , S - X (Intrinsic
Value)
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Basic Option Payoffs Put Option
In the Money
Out of the Money
Payoff
Payoff
Price
Price
Current Stock Price
Option Exercise Price
Stock Payoffs
Put Option Payoffs
Put Option Payoff Max 0 , X - S (Intrinsic
Value)