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Option Basics
Financial Option
A contract that gives its owner the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date
Call options Put options
Option Basics
Option Contracts
Terms:
Derivatives Option Buyer/Option Holder
Long Position
Exercising The Option Strike Price/Exercise Price Expiration Date American Options European Options
Option Basics
Stock Option Quotations
At-The-Money In-The-Money
Deep In-The-Money
Out-Of-The-Money
Deep Out-Of-The-Money
Open Interest
Option Basics
Options on Other Financial Securities
Hedging Speculating
d1
d 2 d1 T
Put-Call Parity
Portfolio Insurance
Protective Put
Purchasing a put option on a stock you already own
Portfolio Insurance
A protective put written on a portfolio rather than a single stock
Portfolio Insurance
Put-Call Parity
Portfolio Insurance
Put-Call Parity: Non-Dividend-Paying Stock
Consider the two different ways to construct portfolio insurance illustrated in the example:
Purchase the stock and a put Purchase a bond and a call Because both positions provide exactly the same payoff, the Law of One Price, requires that they must have the same price: Stock Price + Put Price = PV(Strike Price) + Call Price
Put-Call Parity
Portfolio Insurance
Put-Call Parity: Non-Dividend-Paying Stock
Put-Call Parity
Stock Price + Put Price = PV(Strike Price) + Call Price Rearranging terms gives an expression for the price of a European call option for a non-dividend-paying stock: Call Price = Put Price + Stock Price PV(Strike Price)