33 lines
2.1 KiB
Plaintext
33 lines
2.1 KiB
Plaintext
4 Part I: Basic Properties of Stodc Options
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thus, each option has an expiration date. Throughout the book, the term "options" is
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always understood to mean listed options, that is, options traded on national option
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exchanges where a secondary market exists. Unless specifically mentioned, over-the
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counter options are not included in any discussion.
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DESCRIBING OPTIONS
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Four specifications uniquely describe any option contract:
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1. the type (put or call),
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2. the underlying stock name,
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3. the expiration date, and
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4. the striking price.
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As an example, an option referred to as an "XYZ July 50 call" is an option to buy (a
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call) 100 shares (normally) of the underlying XYZ stock for $50 per share. The option
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expires in July. The price of a listed option is quo!_ed on a per-share basis, regardless
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of how many shares of stock can be bought with the option. Thus, if the price of the
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XYZ July 50 call is quoted at $5, buying the option would ordinarily cost $500 ($5 x
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100 shares), plus commissions.
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THE VALUE OF OPTIONS
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An option is a "wasting" asset; that is, it has only an initial value that declines (or
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"wastes" away) as time passes. It may even expire worthless, or the holder may have
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to exercise it in order to recover some value before expiration. Of course, the holder
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may sell the option in the listed option market before expiration.
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An option is also a security by itself, but it is a derivative security. The option is
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irrevocably linked to the underlying stock; its price fluctuates as the price of the
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underlying stock rises or falls. Splits and stock dividends in the underlying stock
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affect the terms of listed options, although cash dividends do not. The holder of a call
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does not receive any cash dividends paid by the underlying stock.
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STANDARDIZATION
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The listed option exchanges have standardized the terms of option contracts. The
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terms of an option constitute the collective name that includes all of the four descrip
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tive specifications. While the type (put or call) and the underlying stock are self-evi
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dent and essentially standardized, the striking price and expiration date require more
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explanation. |