ASB-3215-

Advanced Investment
Theory and Practice
Lecture 7- Derivative Securities

Dilek Ulu

Bangor Business School
2013/2014

Options
Put Option:

A put option gives its holder the right to sell an asset for a specied exercise or
strike price on or before some expiration date.
Call Option:

A call option gives its holder the right to purchase an asset for a specied price,
called the exercise, or strike price, on or before some specied expiration date.
American vs. European options:

An American option allows its holder to exercise the option on or before the
expiration date.
European options allow for exercise of the option only on the expiration date.

Payo Diagrams
Call Option:
Payo

100
Cost of the Call
Option

St
Prot

Payo Diagrams
Payo for Call Option Writers

Prot
Cost of the Call
Option
100
Payo

St

Payo Diagrams
Put Option
100

Payo
100
Cost of the Put Option
Prot

ST

Payo Diagrams
Stock vs. Call Option Return
Option
Rate of
Return
Stock
ST

Payo Tables
Stock Price=S, Strike Price=X
Call Option (Price = C)
Payo

Prot

if S < X

If S=X

If S >X

S-X

- C

- C

S-X-C

Put Option (Price = P)

If S < X

If S=X

If S>X

Payo

X-S

Prot

X-S-P

-P

-P

Payo Diagrams
Long Put

Long Call
X

Stock
Price

Short Call

Stock
Price

Short Put

Option Strategies
Call+Put = Straddle

Long Call

Long Put
Payo

Payo

Prot

0
-c

Prot

ST

0
-P

Straddle
X

Payo

X-P-C
C+P

-(P+C)

Prot

ST

Option Strategies
Call 1- Call 2 (Bullish Spread)

X1=50 X2=60

X1=50

Stock Price

Stock Price

Hold Call

Write Call
X2-X1

0
C2-C1

X1=50

Stock Price
X1=60