35 lines
2.3 KiB
Plaintext
35 lines
2.3 KiB
Plaintext
296 • N o t e s
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2. One more bit of essential but confusing jargon when investing in
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options is related to exercise. There are actually two styles of exercise;
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one can be exercised at any time before expiration—these are termed
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American style—and the other can only be exercised at expiration—
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termed European style. Confusingly, these styles have nothing to do
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about the home country of a given stock or even on what exchange
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they are traded. American-style exercise is normal for all single-stock
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options, whereas European-style exercise is normal for index futures.
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Because this book deals almost solely with single-stock options (i.e.,
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options on IBM or GOOG, etc.), I will not make a big deal out of this
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distinction. There is one case related to dividend-paying stocks where
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American-style exercise is beneficial. This is discussed in Appendix C.
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Most times, exercise style is not a terribly important thing.
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3. Just like going to Atlantic City, even though the nominal odds for rou-
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lette are 50:50, you end up losing money in the long run because you
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have to pay—the house at Atlantic City or the broker on Wall Street—
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just to play the game.
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Chapter 3
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1. We adjusted and annualized the prices of actual option contracts so
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that they would correspond to the probability levels we mentioned
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earlier. It would be almost impossible to find a stock trading at exactly
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$50 and with the option market predicting exactly the range of future
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price that we have shown in the diagrams. This table is provided simply
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to give you an idea of what one might pay for call options of different
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moneyness in the open market.
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2. Eighty-four percent because the bottom line marks the price at which
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there is only a 16 percent chance that the stock will go any lower. If
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there is a 16 percent chance that the stock will be lower than $40 in
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one year’s time, this must mean that there is an 84 percent chance
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that the stock will be higher than $40 in one year’s time. We write
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“a little better than 84 percent chance” because you’ll notice that the
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stock price corresponding to the bottom line of the cone is around
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$42—a little higher than the strike price. The $40 mark might corre-
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spond to a chance of, let’s say, 13 percent that the stock will be lower; |