Finance School of management Chapter 15: Options Contingent claims Objective .To show how the law of one price may be used to derive prices of options To show how to infer implied volatility from option Prices uesTc
1 Finance School of Management Chapter 15: Options & Contingent Claims Objective •To show how the law of one price may be used to derive prices of options •To show how to infer implied volatility from option prices
Finance School of management Chapter 15 Contents How Options Work Investing with Options e The Put-Call Parity relationship Volatility option Prices Two-State Option Pricing . Dynamic replication the binomial model The black-Scholes model Implied volatility uesTc
2 Finance School of Management Chapter 15 Contents ❖ How Options Work ❖ Investing with Options ❖ The Put-Call Parity Relationship ❖ Volatility & Option Prices ❖ Two-State Option Pricing ❖ Dynamic Replication & the Binomial Model ❖ The Black-Scholes Model ❖ Implied Volatility
Finance School of management Objectives To show how the law of one price can be used to derive prices of options To show how to infer implied volatility from option prices uesTc
3 Finance School of Management Objectives ❖ To show how the Law of One Price can be used to derive prices of options ❖ To show how to infer implied volatility from option prices
Finance School of management Terms Underlying Asset, Call, Put, Strike(Exercise) Price, Expiration(Maturity)Date, American European Option Tangible(Intrinsic)value, Time Value ey Out-of-the-money, in-the-money, at-the-mor uesTc
4 Finance School of Management Terms – Underlying Asset, Call, Put, Strike (Exercise) Price, Expiration (Maturity) Date, American / European Option – Out-of-the-money, in-the-money, at-the-money – Tangible (Intrinsic) value, Time Value
Finance School of management Table 15.1 List of IBM Option prices (Source: Wall Street Journal Interactive Edition, May 29, 1998) IBM(IBM) Underlying stock price 120 1/16 Call Put Strike Expiration Volume Last Open Volume Last Open Interest Interest 115Jun13727448375613/169692 115O 2584 10 5 967 115 Jan 155363440 120 Jun 2377 312 8049 873 2718 9849 120 Oct 12195/162561457181993 120 Jan 911212 8842? 5259 125 Jun 1564 112 9764 17 53/4 5900 125 Oct 9171/22360? 731 125 Jan 87101/2124 70 uesTc
5 Finance School of Management Table 15.1 List of IBM Option Prices (Source: Wall Street Journal Interactive Edition, May 29, 1998) IBM (IBM) Underlying stock price 120 1/16 Call . Put . Strike Expiration Volume Last Open Volume Last Open Interest Interest 115 Jun 1372 7 4483 756 1 3/16 9692 115 Oct ? ? 2584 10 5 967 115 Jan ? ? 15 53 6 3/4 40 120 Jun 2377 3 1/2 8049 873 2 7/8 9849 120 Oct 121 9 5/16 2561 45 7 1/8 1993 120 Jan 91 12 1/2 8842 ? ? 5259 125 Jun 1564 1 1/2 9764 17 5 3/4 5900 125 Oct 91 7 1/2 2360 ? ? 731 125 Jan 87 10 1/2 124 ? ? 70