# Options This PowerPoint presentation consists of two examples. Put Option C

The Above Picture is Related Image of Another Journal

## Options This PowerPoint presentation consists of two examples. Put Option C

Related University That Contributed for this Journal are Acknowledged in the above Image

Stock Option The IBM stock is currently selling in consideration of \$50 per share. Ignoring any transactions costs (e.g., brokerage fees), what are your potential gains in addition to losses? The answer is pretty clear, but we?ll create a little table anyway. What would your profit in addition to loss be if the price three months from now was \$40? \$45? \$50? \$55? \$60? 3 Month Current Profit or Price Price Loss \$40 \$50 -\$10 \$45 \$50 -\$5 \$50 \$50 \$0 \$55 \$50 +\$5 \$60 \$50 +\$10 Now, plot this on a graph? Stock Option Along the horizontal axis, plot the various prices of the stock. Along the vertical axis plot? Stock Option Along the horizontal axis, plot the various prices of the stock. Along the vertical axis plot?the profit (gain) in addition to loss in consideration of each ending price. Now, plot the results from the table on a line in addition to imagine doing it in consideration of all prices in-between?

Stock Option We have a graph in consideration of the payoffs from buying the stock outright. The graph is often so that use so that understand the payoffs in consideration of derivatives. Stock Option We see that this investment has large potential gains in addition to losses. However, by using options we could minimize the losses. If this was your intention, then should you purchase a ?Call? or ?Put? option? Stock Option: Put Option Suppose you purchased a Put Option at the same time you purchase this stock. Recall, a put option will give you the right ? but not obligation ? so that sell the stock at the exercise price.

Mengkuo Wang, Douglass L. Henderson, Timothy J. Tautges, Laila El-Guebaly, Xueren Wang, University of Wisconsin ? Madison

Stock Option: Put Option Suppose the put costs you \$5 in addition to has an exercise price of \$50. First, how would you graphically describe the profit in addition to loss from the put option by itself? Hence, ignore the fact that you purchased the stock in consideration of now. Stock Option: Put Option If the price at the end of the three months fell so that near zero, then you could exercise your option in addition to purchase the stock at near zero, then sell it in consideration of \$50 ? making a nice profit of \$45 (the \$50 sale price minus the cost of the option). Stock Option: Put Option If the price falls only so that \$45, then you would just break-even. Thus, you purchase the stock in consideration of \$45 in addition to sell it immediately in consideration of \$50 making \$5, but that was the cost of the option itself.

Stock Option: Put Option If the price rose so that say \$60, then you would not exercise the option. Because if you did, you would have so that pay \$60 in consideration of a stock that you?ll sale in consideration of \$50. The nice thing about the ?option? is that you need not use it. Thus, you end up losing the \$5 that it cost you so that buy the option. Stock Option: Put Option We can now plot the profit in addition to loss opportunities from purchasing the \$5 put. Buying a put option along would be an indication that you were very ?bearish? on this stock ? believing its price will fall within the next three months. Stock Option: Put Option Notice why options are so tempting so that speculators. You only need so that have the cost of the option in order so that ?bet? on the price of this stock.

Stock Option: Put Option Now, return so that our initial purchase of the IBM stock. Our intention was so that purchase the stock in addition to attempt so that reduce our risk of big losses. Thus, we purchase the \$5 put option at the same time. How will our profits in addition to loss opportunities change? Stock Option: Put Option If the price ends up below \$50, then we can exercise our option so that sell the stock at a price of \$50 ? resulting in a \$5 loss (don?t forget about the cost of the option). Stock Option: Put Option If the price ends up at \$55, then we do not exercise our option so that sell at \$50. We break-even in this case: Sell stock at \$55 making \$5 (\$55-\$50) which just covers the cost of the option.

Stock Option: Put Option At any price above \$55, we will make a profit. The profit will always be \$5 less than if we had simply bought the stock without the put option. Stock Option: Call Option Now, we will see how a call option is used. Suppose three months had passed in addition to the price of your stock remained at \$50. You are forced so that sell in order so that pay tuition (or, in consideration of whatever reason), but still remain ?bullish? on this stock ? believing the price is about so that skyrocket. Stock Option: Call Option You don?t want so that miss out on the increase in the price which you believe will occur soon. So, you take \$5 from your sale in addition to purchase a ?Call Option?. Recall, a call option gives you the right ? but not obligation ? so that buy an asset at the exercise price.

Stock Option: Call Option The cost of the call option is \$5 alongside an exercise price of \$50, in addition to an expiration date 3 months from now. What are your profit in addition to loss opportunities? If the price in 3 months was below \$50, what would occur? Stock Option: Call Option If the price in 3 months was below \$50, what would occur? You would not exercise your right so that buy the stock at \$50 if the price at the time was below it. Thus, you would lose the cost of the option. If the price were between \$50 in addition to \$55? Stock Option: Call Option If the price were between \$50 in addition to \$55? Say the price ended up at \$53, then you would exercise your right so that buy at \$50, then immediately sell at \$53 ? making \$3. However, the option cost you \$5, so you end up losing \$2. When the price rises above \$55?

Stock Option: Call Option When the price rises above \$55? Say the price ended at \$60, then you exercise your option so that buy at \$50 in addition to immediately sell at \$60 ? making \$10. After subtracting the cost of the option (\$5), you end up alongside a \$5. How does this compare so that simply buying the stock? Stock Option: Call Option For a \$5 investment (the cost of the option), you have the opportunity so that make large profits. Compared so that simply buying the stock (or, in this example continuing so that hold on so that it in addition to not pay tuition), your profit opportunities are always \$5 less alongside the call option. However, ? Stock Option: Call Option you can only lose the \$5 cost of the option. The graph below is identical so that the situation of buying the stock in addition to a \$5 put option. These will always be similar outcomes ? though our numbers make them identical.