Options Research
Essay Preview: Options Research
Report this essay
OPTIONS Research
options are derivatives. They derive their value on on the future price of a stock.
dC=Delta dS + Gamma frac{dS^2}{2} + kappa dsigma + theta dt ,
^ above is the the change in the value of an option
Options the simplest way to explain is that you purchase a option to buy a stock at a future date and at future price. Of course options can be used
in many ways besides that, for speculative investing and hedging against certain situations.
Basic info- Options gives the right to sell or buy a stock. (not requirement, just the option). * buying futures is the opposite, it is a requirement, but thats another thing
Starting with basic option investing terminology:
calls- buy the “option” to buy 100 shares of the underlying stock at a fixed price and for a fixed period of time.
put- sell the “option” to sell 100 shares of the underlying stock at a fixed price and for a fixed period of time.
strike price- also known as “exercise price” it is the price that the underlying security will be bought or sold at if the option is exercised
expiration date- the different kinds of expiration on options below.*note, its just a name. its doesnt limit you to a specified region.
* European option – an option that may only be exercised on expiration.
* American option – an option that may be exercised on any trading day on or before expiration.
* Bermudan option – an option that may be exercised only on specified dates on or before expiration.
* Barrier option – any option with the general characteristic that the underlying securitys price must reach some trigger level before the exercise can occur.
Strategies
Long call- believe stock will rise (above exercised price). Ex: buy a call option for 10 in July (exercised price). The current stock price is 9. In July the stock is worth 15. Exercise
the option, and the buyer will be able the buy the stock for 10. and then sell it for 15
Short call- aka naked call. sell call option without owning it. Ex. write call for 10 in July. The current stock price is 8. In July the stock is worth 9. Call cant be exercise before
expiration date, so the the writer makes money from the contract of option.
Long put- believe stock will go down. buys the right to sell at a fixed price. Ex. buy a put option at 10 (exercised price) in July. The current stock price is 12. In July the stock is
worth 8. Exercise the option, and the seller will be able to sell the stock for 10.
Short put- believe stock will go up. buys the right to buy at a fixed price. Ex. buy put put option at 10(exercised price) in July. The current stock price is 9. In July the stock is
worth 12. Exercise the option, and the buyer will be able to buy for 10.
***** “options” can also be sold and bought. Ex: you have a call option for 10 in July. Its May and the stock is worth 13 already. The option is now worth a lot(using the formula above),
that option can now be sold to make a profit.
How to read an options Chart
Column 1: Strike Price – This is the