Options
    • Derivatives are securities derive value from 
       the price of other securities.
    • Powerful tools: 
       • Hedging:
       • Speculation:
    • Options are traded both on organized 
       exchanges and OTC.
                                       INVESTMENTS | BODIE, KANE, 
                                       MARCUS
                              ©2018 McGraw-Hill Education             20-2
                      The Option
     • Premium:
     • Exercise Price: 
     • Expiration Date:
                                       INVESTMENTS | BODIE, KANE, 
                                       MARCUS
                              ©2018 McGraw-Hill Education             20-3
      The Option Contract: Calls
     • A call option gives its holder the right 
        to buy an asset:
        • At the exercise price
        • On or before the expiration date
     • Exercise the option if:
        •  market value > exercise price.
                                       INVESTMENTS | BODIE, KANE, 
                                       MARCUS
                              ©2018 McGraw-Hill Education             20-4
      The Option Contract: Puts
     • A put option gives its holder the right 
        to sell an asset:
        • At the exercise price
        • On or before the expiration date
     • Exercise the option if:
        • market value < exercise price.
                                       INVESTMENTS | BODIE, KANE, 
                                       MARCUS
                              ©2018 McGraw-Hill Education             20-5
            The Option Contract
     • Sellers (writers) of options receive 
        premium income.
     • If holder exercises the option, the 
        option writer must make (call) or 
        take (put) delivery of the underlying 
        asset.
                                       INVESTMENTS | BODIE, KANE, 
                                       MARCUS
                              ©2018 McGraw-Hill Education             20-6