1 Chapter 7 Options Options 2 Outlines ?? Concept of Options Concept of Options ?? Types of options Types of options ?? American options American options vs. vs. European options European options ?? Call options vs. Put options Call options vs. Put options ?? OTC Options vs. Exchange-Traded Options OTC Options vs. Exchange-Traded Options ?? positions & payoffs positions & payoffs ?? Terminology Terminology ?? Strategies using options Strategies using options 3 ?? Concept of Options Concept of Options ?? Definition: Definition: The right, but not the obligation, to buy The right, but not the obligation, to buy (for a (for a call option call option ) or sell (for a ) or sell (for a put option put option ) a specific ) a specific amount of a given stock, commodity, currency, index, amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during or debt, at a specified price (the strike price) during a specified period of time. a specified period of time. buyer premium Seller/writer The option ’ s price The right to buy or sell 4 concept of options ?? The price at which the asset can be purchased The price at which the asset can be purchased or sold is known as the or sold is known as the strike price/exercise strike price/exercise price. price. ?? The date when the option expires is known as The date when the option expires is known as the exercise date, the the exercise date, the expiration date, or the expiration date, or the maturity date maturity date . . 5 types of options: American options vs. European options ?? American options American options can be exercised at any can be exercised at any time up to the expiration date. time up to the expiration date. ?? European options European options can be exercised only on can be exercised only on the expiration date itself. the expiration date itself. 6