Topics
Valuation/Pricing of Options
T7.3 Price Quotes:Call Premia on BA: 27th July 2000 (pence) Strike Price K 360 390 ___ October 36.5 21.5 Expiry Month Jan 50 35.5 . April 57.5 44
How do the call premia vary with the time to maturity ? How do the call premia vary with the strike price? Could you make a profit from immediately exercising these options ? Oct 360 call: Intrinsic Value = $ amount if immediately exercised = 376-360 = St - K = 16 (In-the-money) So, Time Value = C - 41 = 20.5 (payment for possibility of price rise in the future
Copyright K.Cuthbertson, D.Nitzsche.
Time to maturity, T (+ or -)
Current Spot price, relative to strike price, S /K (+) Volatility spot price (+)
Current Spot price, relative to strike price, S /K Volatility spot price (+) (-)
Interest rate
r (+)
Interest rate
r (+ or - )
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Black-Scholes (Merton)
ln( S / K ) (r / 2)T d 2 d1 T T
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Copyright K.Cuthbertson, D.Nitzsche. 6
Call Premium
Value of call prior to expiry
Ct
. BC=Time value .C
CD=Intrinsic value
A K
S0= 100 S1= 101
.D
St Stock Price
Black-Scholes
Key results are CALLS Call premium increases as stock price increases (but less than one-for-one) Call premium increases if the volatility of the stock increases PUTS Put premium falls as stock price increases (but less than one-for-one) Put premium increases if the volatility of the stock increases
Copyright K.Cuthbertson, D.Nitzsche.
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The contract size for one call option contract is for 100 shares But the price of the call option C is quoted as if there was only one share underlying the option
(i.e. we need to multiply C by 100 to get the invoice price of the option)
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Ct
. BC=Time value .C
CD=Intrinsic value
A K
S0= 100 S1= 101
.D
St Stock Price
To close out you must now buy back at C1 = 9.6 Loss on 40 shares = $40
= $40
DELTA HEDGING YOUR 40 SHARES WITH 1 WRITTEN CALL OPTION MEANS THAT THE VALUE OF YOUR POSITION WILL BE UNCHANGED.
Copyright K.Cuthbertson, D.Nitzsche. 15
D 0.5 B
D 0.4
.
0
100
110
Stock Price
END OF SLIDES
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