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• Call Option
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London Stock Exchange - MTS
1
In 2007, after Borsa Italiana announced
its call option exercise right to acquire
full control of MBE Holdings, the
combined Group would now control
Mercato del Titoli di Stato, or MTS. This
merger of Borsa Italiana and MTS with
the London Stock Exchange’s existing
bond listing business, enhanced the
range of covered European fixed
income markets.
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Valuation (finance) - Valuation overview
#Valuation of options|Option pricing
models are used for certain types of
financial assets (e.g., Warrant
(finance)|warrants, put options, call
options, employee stock options,
investments with embedded options
such as a callable bond) and are a
complex present value model. The most
common option pricing models are the
Black–Scholes-Robert C. Merton|Merton
models and lattice model
(finance)|lattice models.
1
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Demand response - Electricity pricing
1
In effect, consumers served under
these fixed rate tariffs are endowed
with real call options on
electricity.Borlick, Robert L., Pricing
Negawatts - DR design flaws create
perverse incentives, PUBLIC
UTILITIES FORTNIGHTLY, August
2010.
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Patent valuation - Option-based method
1
Thus patent rights can be thought of
as corresponding to a call option and
may be Option (finance)#Model
implementation|valued
correspondingly
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Economics and patents - Patent valuation
1
Thus patent rights can be thought of as
corresponding to a call option and may be
Option (finance)#Model
implementation|valued correspondingly
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Security (finance)
1
A 'security' or 'financial instrument' is a tradable asset of any kind.The
United States Securities Exchange Act of 1934 defines a security as:
Any note, stock, treasury stock, Government investment|bond,
debenture, certificate of interest or participation in any profit-sharing
agreement or in any oil, gas, or other mineral royalties|royalty or lease,
any collateral (finance)|collateral Trust certificate (finance)|trust
certificate, preorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, certificate of
deposit, for a security, any put option|put, call option|call, straddle,
option (finance)|option, or group or index of securities (including any
interest therein or based on the value thereof), or any put, call,
straddle, option, or privilege entered into on a national Exchange
(organized market)|securities exchange relating to foreign currency, or
in general, any Financial instrument|instrument commonly known as a
security; or any certificate of interest or participation in, temporary or
interim certificate for, receipt for, or warrant or right to subscribe to or
purchase, any of the foregoing; but shall not include currency or any
note, draft, bill of exchange, or banker's acceptance which has a
Maturity (finance)|maturity at the time of issuance of not exceeding
nine months, exclusive of days of grace, or any renewal thereof the
maturity of which is likewise limited
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Electricity market - Risk management
1
Many other Hedge (finance)|hedging
arrangements, such as swing
contracts, Virtual Bidding, Financial
Transmission Rights, call options and
put options are traded in sophisticated
electricity markets. In general they
are designed to transfer financial
risks between participants.
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Corporate finance - Valuing flexibility
1
Again, a DCF valuation would capture only
one of these outcomes.) Here: (1) using
Option (finance)|financial option theory as a
framework, the decision to be taken is
identified as corresponding to either a call
option or a put option; (2) an appropriate
valuation technique is then employed –
usually a variant on the Binomial options
model or a bespoke Monte Carlo methods in
finance|simulation model, while BlackScholes formula|Black Scholes type
formulae are used less often; see Contingent
claim valuation
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Executive pay
1
It is typically a mixture of salary, bonuses,
shares of or call options on the company
stock, benefits, and perquisites, ideally
configured to take into account government
regulations, tax law, the desires of the
organization and the executive, and rewards
for
performance.[http://books.google.com/book
s?id=hBPaskPAJUQCprintsec=frontcoverdq=
executive+payhl=ensa=Xei=wtl5T_CNDYuM0
QHP7STDQved=0CEAQ6AEwAQ#v=onepageq=ex
ecutive%20payf=false The complete guide to
executive compensation] By Bruce R
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Executive pay - Stock options
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This is because the value of a call option
increases with increased Volatility
(finance)|volatility (see options pricing)
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Channel coordination - Options
1
as buy rights to purchase
more (call option) or return
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Eurowings - History
1
As at 31 December 2006, Lufthansa had a
49% shareholding in Eurowings with a call
option for 50.91% of the remaining stakes,
bringing the company into the Lufthansa
Group fold
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Australian Securities Exchange - Timeline of significant events
'1976': The Australian
Options Market was
established, trading call
options.
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Vienna Capital Partners - Investment in BorsodChem
The stake and call option were
provided partly in return for a 140
million Euros investment from
Wanhua, which BorsodChem would
put towards the completion of a
toluene diisocyanate (TDI) plant and a
nitric acid facility at its main site at
Kazincbarcika, Hungary
1
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Commodity market - Call options
In a call option
counterparty|counterparties enter into
a financial contract option where the
buyer purchases the right but not the
obligation to buy an agreed quantity of
a particular commodity or financial
instrument (the underlying) from the
seller of the option at a certain time (the
expiration date) for a certain price (the
strike price)
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Right of first refusal
'Right of first refusal' ('ROFR' or
'RFR') is a contractual right that gives
its holder the option to enter a
business transaction with the owner of
something, according to specified
terms, before the owner is entitled to
enter into that transaction with a third
party. In brief, the right of first refusal
is similar in concept to a call option.
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Insider trading - Court decisions
1
O'Hagan used this inside information
by buying call options on Pillsbury
stock, resulting in profits of over $4
million
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Employee stock option
1
An 'employee stock option' ('ESO') is commonly
viewed as a complex call option on the common
stock of a company, granted by the company to an
employee as part of the employee's
Remuneration|remuneration
package.[http://www.esopdirect.com/faq.html see
Employee Stock Option FAQ's] Regulators and
economists have since specified that employee
stock options is a label that refers to compensation
contracts between an employer and an employee
that carries some characteristics of financial
options but are not in and of themselves options
(that is they are compensation contracts).
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Employee stock option
1
From the employee's point of view, the
compensation contract provides a
conditional right to buy the equity of
the employer and when modeled as an
option, the employee's perspective is
that of a long position in a call option
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Employee stock option - Objectives
1
Employee stock options are similar to
exchange traded call options issued by
a company with respect to its own
stock.
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Employee stock option - Contract differences
1
There is a substantial risk that when
the ESOs are granted (perhaps
50%[http://www.hoadley.net/options/
optiongraphs.aspx Call Option Price
Time Value by Stock Price]) that the
options will be worthless at
expiration.http://www.hoadley.net/op
tions/probgraphs.aspx This should
encourage the holders to reduce risk
by selling exchange traded call
options
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At the money
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In finance, 'moneyness' is the relative
position of the current price (or future
price) of an underlying asset (e.g., a
stock) with respect to the strike price
of a derivative (finance)|derivative,
most commonly a call option or a put
option
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At the money
It can be measured in percentage
probability of expiring in the money, which
is the forward value of a binary call option
with the given strike,
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At the money - Example
Suppose the current stock price of
IBM is $100. A call option|call or put
option with a strike of $100 is at-themoney. A call option with a strike of
$80 is in-the-money (100 minus; 80 =
20 gt; 0). A put option with a strike at
$80 is out-of-the-money (80 minus; 100
= minus;20 lt; 0). Conversely, a call
option with a $120 strike is out-of-themoney and a put option with a $120
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At the money - Intrinsic value and time value
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The intrinsic value (or monetary value) of
an option is its value assuming it were
exercised immediately. Thus if the current
(Spot price|spot) price of the underlying
security (or commodity etc.) is above the
agreed (Strike price|strike) price, a Call
option|call has positive intrinsic value (and
is called in the money), while a Put
option|put has zero intrinsic value (and is
out of the money).
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At the money - In the money
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An 'in the money' (ITM) option has positive
intrinsic value as well as time value. A call
option is in the money when the strike
price is below the spot price. A put option
is in the money when the strike price is
above the spot price.
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At the money - Out of the money
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An 'out of the money' (OTM) option has no
intrinsic value. A call option is out of the
money when the strike price is above the
spot price of the underlying security. A put
option is out of the money when the strike
price is below the spot price.
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At the money - Simple examples
1
Thus a 25 Delta call option has less
than 25% moneyness, usually slightly
less, and a 50 Delta ATM cal option
has less than 50% moneyness; these
discrepancies can be observed in
prices of binary options and vertical
spreads
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Quantitative analysis (finance) - History
1
It provided a solution for a practical
problem, that of finding a fair price
for a European call option, i.e., the
right to buy one share of a given stock
at a specified price and time
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Derivative (finance) - Common derivative contract types
1
The buyer of a Call option has a right
to buy a certain quantity of the
underlying asset, at a specified price
on or before a given date in the future,
he however has no obligation
whatsoever to carry out this right
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Put option
Puts may also be combined with other
derivatives as part of more complex
investment strategies, and in particular,
may be useful for Hedge
(finance)|hedging. Note that by put-call
parity, a European put can be replaced by
buying the appropriate call option and
selling an appropriate forward contract.
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Rational pricing - Options
It is possible to create a position
consisting of 'Δ' shares and 1 call
option|call sold, such that the
position’s value will be identical in the
S up and S down states, and hence
known with certainty (see Delta
hedging)
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Long-Term Capital Management - 1998 bailout
1
LTCM's strategies were compared (a
contrast with the market efficiency
aphorism that there are no $100 bills
lying on the street, as someone else
has already picked them up) to
picking up nickels in front of a
bulldozer – a likely small gain
balanced against a small chance of a
large loss, like the payouts from
selling an out-of-the-money naked call
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Valuation of options - Intrinsic value
1
For a call option, the option is in-themoney if the underlying price is higher
than the strike price; then the intrinsic
value is the underlying price minus the
strike price
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Valuation of options - Intrinsic value
1
: = current stock price –
strike price (call option)
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Valuation of options - Time value
* Price of the underlying: Any
fluctuation in the price of the
underlying (stock/index/commodity)
obviously has the largest impact on
premium of an option contract. An
increase in the underlying price
increases the premium of call option
and decreases the premium of put
option. Reverse is true when
underlying price decreases.
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Agency Theory - Options framework
1
At the same time, since equity may be
seen as a call option on the value of the
firm, an increase in the variance in the
firm value, other things remaining
equal, will lead to an increase in the
value of equity, and stockholders may
therefore take risky projects with
negative net present values, which
while making them better off, may make
the bondholders worse off
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Agency Theory - Tournaments
like a call option on performance
(which increases in value with
increased Volatility (finance)|volatility
(cf. options pricing).
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Business valuation - Option pricing approaches
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In general, equity may be viewed as a
call option on the firm,
[http://links.jstor.org/sici?sici=00223808%28197305%2F06%2981%3A3%3C
637%3ATPOOAC%3E2.0.CO%3B2-P]
and this allows for the valuation of
troubled firms which may otherwise
be difficult to analyse;Aswath
Damodaran (Stern School of Business):
[http://people.stern.nyu.edu/adamod
ar/pdfiles/Seminars/AIMR3.pdf
Valuing Firms in Distress]
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Call option
1
The buyer of the call option has the right,
but not the obligation to buy an agreed
quantity of a particular commodity or
financial instrument (the underlying) from
the seller of the option at a certain time
(the expiration date) for a certain price (the
strike price)
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Call option
The seller of the call is said to have
shorted the call option, and keeps the
premium (the amount the buyer pays to
buy the option) whether or not the buyer
ever exercises the option
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Call option
1
Since the payoff for sold, or written call
options increases as the stock price falls,
selling call options is considered bearish
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Call option
1
Strike price: this is the price at which
you can buy the stock (if you have
bought a call option) or the price at
which you must sell your stock (if you
have sold a call option).
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Call option
1
The initial transaction in this context
(buying/selling a call option) is not
the supplying of a physical or
financial asset (the underlying
instrument). Rather it is the granting
of the right to buy the underlying
asset, in exchange for a fee— the
option price or premium.
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Call option
1
Exact specifications may differ depending
on option style. A European
option|European call option allows the
holder to exercise the option (i.e., to buy)
only on the option expiration date. An
American option|American call option
allows exercise at any time during the life
of the option.
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Call option
In contrast, when a call option is
exercised, the underlying asset is
transferred from one owner to another.
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Call option - Example of a call option on a stock
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* ABC Corp stock subsequently goes up to
$60 per share before the contract expires.
Christina exercises the call option by
buying 100 shares of ABC from Stacey for
a total of $5,000. Christina then sells the
stock on the market at market price for a
total of $6,000. Christina has paid a $500
contract premium plus a stock cost of
$5,000, for a total of $5,500. She has
earned back $6,000, yielding a net profit of
$500.
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Call option - Example of a call option on a stock
Her total costs are then the $5 per
share premium for the call option, plus
$50 per share to buy the shares from
Stacey, for a total of $5,500
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Call option - Value of a call
Let \Pi be a call option for this
instrument, purchased at time 0,
expiring at time T\in\mathbb^, with
exercise (strike) price K\in\mathbb;
and let S:[0,T]\to\mathbb be the price
of the underlying instrument.
1
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Call option - Value of a call
1
Hence the pay-off, i.e.
the value of the call
option at expiry, is
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Call option - Price of options
1
Adjustment to Call Option:
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Call option - Price of options
1
When a call option is in-the-money i.e.
when the buyer is making profit, she has
many options. Some of them are as
follows:
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Hedge (finance) - Related concepts
1
** Call option: A contract that gives the
owner the right, but not the obligation, to
buy an item in the future, at a price
decided now.
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Black–Scholes model - Criticism
1
2, 2011 They also assert that Boness in
1964 had already published a formula that
is actually identical to the Black–Scholes
call option pricing equation.Boness, A
James, 1964, Elements of a theory of
stock-option value, Journal of Political
Economy, 72,
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Stock - Stock derivatives
Apart from employee stock option|call
options granted to employees, most stock
options are transferable.
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Option (finance)
1
Both are commonly traded, but for clarity, the call
option is more frequently discussed.
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Option (finance) - Contract specifications
1
* whether the option holder has the
right to buy (a call option) or the right
to sell (a put option)
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Option (finance) - Example
1
We can calculate the estimated value of
the call option by applying the hedge
parameters to the new model inputs as:
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Option (finance) - Long call
A trader who believes that a stock's
price will 'increase' might buy the
right to purchase the stock (a call
option) at a fixed price, rather than
just purchase the stock itself. He
would have no obligation to buy the
stock, only the right to do so until the
expiration date. If the stock price(spot
Price,S) at expiration is above the
exercise price(X) by more than the
premium (price) paid P, he will profit
i.e. if S-Xref name=GlobalCitation
1
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Exotic option - Features
1
A straight call option|call or put option|put
option, either Option style|American or
Option style|European, would be
considered non-exotic or vanilla option.
There is no strict definition of what is
considered an exotic option but it could
have one or more of the following features:
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Bond (finance) - Others
** Callability — Some bonds give the
issuer the right to repay the bond before
the maturity date on the call dates; see call
option
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Real options valuation
1
For example, the opportunity to invest
in the expansion of a firm's factory, or
alternatively to sell the factory, is a real
call option|call or put option,
respectively
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Real options valuation - Options relating to project size
1
This is equivalent to a
call option.
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Real options valuation - Options relating to project size
1
*'Option to expand or contract': Here
the project is designed such that its
operation can be dynamically turned
on and off. Management may shut
down part or all of the operation when
conditions are unfavourable (a put
option), and may restart operations
when conditions improve (a call
option). A flexible manufacturing
system (FMS) is a good example of
this type of option. This option is also
known as a 'Switching option'.
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Real options valuation - Options relating to project life and timing
1
*'Initiation or deferment options': Here
management has flexibility as to when to
start a project. For example, in natural
resource exploration a firm can delay
mining a deposit until market conditions
are favorable. This constitutes an
American option|American styled call
option.
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Futures contract - Options on futures
1
A put option|put is the option to sell a
futures contract, and a call option|call is
the option to buy a futures contract
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Commercial banking - Unsecured loan
Some corporate bonds have an
embedded call option that allows the
issuer to redeem the debt before its
maturity date. Other bonds, known as
convertible bonds, allow investors to
convert the bond into equity.
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Investor
An 'investor' is a person who allocates
capital with the expectation of a financial
return. The types of investments include:
gambling and speculation, stock|equity,
Bond (finance)|debt Security
(finance)|securities, real estate, currency,
commodity, derivatives such as put and
call options, etc. This definition makes
no distinction between those in the
primary and secondary markets. That is,
someone who provides a business with
capital and someone who buys a stock
are both investors.
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Troubled Asset Relief Program - American Bankers Association's attempts to expunge
the TARP warrants
1
Warrants are call options that add to the
number of shares of stock outstanding if
they are exercised for a profit
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Securities
1
A 'security' is a tradable asset of any kind.The United States Securities
Exchange Act of 1934 defines a security as: Any note, stock, treasury stock,
Government investment|bond, debenture, certificate of interest or
participation in any profit-sharing agreement or in any oil, gas, or other
mineral royalties|royalty or lease, any collateral (finance)|collateral Trust
certificate (finance)|trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit, for a security, any put option|put, call option|call,
straddle, option (finance)|option, or group or index of securities (including
any interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national Exchange (organized
market)|securities exchange relating to foreign currency, or in general, any
Financial instrument|instrument commonly known as a security; or any
certificate of interest or participation in, temporary or interim certificate for,
receipt for, or warrant or right to subscribe to or purchase, any of the
foregoing; but shall not include currency or any note, draft, bill of exchange,
or banker's acceptance which has a Maturity (finance)|maturity at the time
of issuance of not exceeding nine months, exclusive of days of grace, or
any renewal thereof the maturity of which is likewise limited
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Warrant (finance) - Comparison with call options
1
Warrants are very similar to call options.
For instance, many warrants confer the
same rights as equity options and
warrants often can be traded in secondary
markets like options. However, there also
are several key differences between
warrants and equity options:
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Warrant (finance) - Comparison with call options
1
When a call option is exercised, the owner
of the call option receives an existing
share from an assigned call writer (except
in the case of employee stock options,
where new shares are created and issued
by the company upon exercise)
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Warrant (finance) - Naked
Financially they are also similar to call
options, but are typically bought by retail
investors, rather than investment funds or
banks, who prefer the more keenly priced
options which tend to trade on a different
market
1
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Warrant (finance) - Third-party warrants
1
Third-party warrants are
essentially long-term call
options
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Convertible bond - Types
1
*'Reverse convertibles' are a less common
variation, mostly issued synthetically.
They would be opposite of the vanilla
structure: the conversion price would act
as a knock-in short call option: as the
stock price drops below the conversion
price the investor would start to be
exposed the underlying stock
performance and no longer able to
redeem at par its bond. This negative
convexity would be compensated by a
usually high regular coupon payment.
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Convertible bond - Types
1
*'Packaged convertibles' or sometimes
Bond + Option structures are simply a
straight bonds and a call option/warrant
wrapped together
https://store.theartofservice.com/the-call-option-toolkit.html
Convertible bond - Additional features
1
This should not be
mistaken for a call
option
https://store.theartofservice.com/the-call-option-toolkit.html
Convertible bond - Uses for investors
1
*Also, convertible bonds are usually
less volatile than regular shares.
Indeed, a convertible bond behaves
like a call option. Therefore, if C is the
call price and S the regular share then
https://store.theartofservice.com/the-call-option-toolkit.html
High-yield debt - Debt repackaging and subprime crisis
Removing toxic assets would also
reduce the volatility of banks' stock
prices. Because stock is akin to a call
option on a firm's assets, this lost
Volatility (finance)|volatility will hurt
the stock price of distressed banks.
Therefore, such banks will only sell
toxic assets at above market prices.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Fuel hedging
1
If a large fuel consuming company buys a
fuel call option, which requires an upfront
premium cost, much like insurance, and
the price of fuel decreases, the company
will not receive a return on the option but
they will benefit from buying fuel at the
then lower cost.
https://store.theartofservice.com/the-call-option-toolkit.html
Reverse greenshoe
A 'Reverse greenshoe' is a special
provision (accounting)|provision in an
Initial Public Offering|IPO prospectus
(finance)|prospectus, which allows
underwriters to sell shares back to the
issuer. If a 'regular' greenshoe is, in fact, a
call option written by the issuer for the
underwriters, a reverse greenshoe is a put
option.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Reverse greenshoe - How regular greenshoe option works
*Regular greenshoe option is a
physically settled call option given to
the underwriter by the issuer.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Option contract - Introduction
1
* 'Call options', which give the beneficiary
the right to require the grantor to sell or
convey the property to them at the agreed
price on exercise
https://store.theartofservice.com/the-call-option-toolkit.html
PCP
1
*Put–call parity, in financial mathematics a
relationship between the price of a call
option and a put option
https://store.theartofservice.com/the-call-option-toolkit.html
Emergency Economic Stabilization Act of 2008 - Mortgage asset purchases
Because stock is a call option on a
firm's assets, this lost Volatility
(finance)|volatility will hurt the stock
price of distressed banks
1
https://store.theartofservice.com/the-call-option-toolkit.html
Strike price
1
In finance, the 'strike price' (or 'exercise
price') of an option (finance)|option is the
fixed price at which the owner of the option
can buy (in the case of a call option|call),
or sell (in the case of a put option|put), the
underlying security or commodity.
https://store.theartofservice.com/the-call-option-toolkit.html
Strike price - Moneyness
1
* A call option is in-the-money if the strike
price is below the market price of the
underlying stock.
https://store.theartofservice.com/the-call-option-toolkit.html
Strike price - Moneyness
1
* A call option is out-of-the-money if the
strike price is above the market price of
the underlying stock.
https://store.theartofservice.com/the-call-option-toolkit.html
Strike price - Mathematical formula
1
A call option has positive monetary value
at expiration when the underlying has a
spot price ('S') above the strike price ('K').
Since the option will not be exercised
unless it is in-the-money, the payoff for a
call option is
https://store.theartofservice.com/the-call-option-toolkit.html
Capital Purchase Program - Warrants
1
Warrants are call options that add to the
number of shares of stock outstanding if
they are exercised for a profit
https://store.theartofservice.com/the-call-option-toolkit.html
Public-Private Investment Program for Legacy Assets - Criticism
1
Because stock is a call option on a firm's
assets, this lost Volatility (finance)|volatility
will hurt the stock price of distressed
banks
https://store.theartofservice.com/the-call-option-toolkit.html
9/11 conspiracy theories - Suspected insider trading
This compares with a
mere 748 call options
in American purchased
that day
1
https://store.theartofservice.com/the-call-option-toolkit.html
9/11 conspiracy theories - Suspected insider trading
1
Raytheon, a defense contractor, had
an anomalously high number of call
options trading on September 10. A
Raytheon option that makes money if
shares are more than $25 each had 232
options contracts traded on the day
before the attacks, almost six times
the total number of trades that had
occurred before that day.
https://store.theartofservice.com/the-call-option-toolkit.html
Margin (finance) - Types of margin requirements
1
;Example 1: An investor sells a call option,
where the buyer has the right to buy 100
shares in Universal Widgets S.A
https://store.theartofservice.com/the-call-option-toolkit.html
Short (finance) - Short selling terms
This has important implications for
derivatives pricing and strategy, as the
borrow cost itself can become a
significant convenience yield for holding
the stock (similar to additional dividend) for instance, put-call parity relationships
are broken and the Exercise
(options)|early exercise feature of
American call options on non-dividend
paying stocks can become Exercise
(options)#Exercise
Considerations|rational to exercise early,
which otherwise would not be
economical.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Treasury stock - Incentives
1
Finally, if the sellers into a corporate
buyback are actually the call option
holders themselves, they may directly
benefit from temporary unrealistically
favorable pricing.
https://store.theartofservice.com/the-call-option-toolkit.html
Investors
1
The types of investments include:
stock|equity, Bond (finance)|debt
Security (finance)|securities, real
estate, currency, commodity,
derivatives such as put and call
options, etc
https://store.theartofservice.com/the-call-option-toolkit.html
Put/call ratio
1
'Put/call ratio' (or put–call ratio, PCR) is
a technical indicator demonstrating
investors'
sentiment.[http://www.investopedia.co
m/terms/p/putcallratio.asp Put–Call
Ratio] The ratio represents a proportion
between all the put options and all the
call options purchased on any given day.
The put/call ratio can be calculated for
any individual stock, as well as for any
index, or can be aggregated. The ratio
may be calculated using the numbers of
puts and calls or on a dollar-weighted
basis.
https://store.theartofservice.com/the-call-option-toolkit.html
Exchange-traded fund - Trading
1
Also, many ETFs have the capability
for Option (finance)|options (Put
option|puts and Call option|calls) to
be written against them
https://store.theartofservice.com/the-call-option-toolkit.html
Economic stability - Firm-Level Stability Measures
1
In this model, an institution’s equity
(finance)|equity is treated as a call
option on its held assets, taking into
account the volatility of those assets
https://store.theartofservice.com/the-call-option-toolkit.html
Risk-neutral measure - Usage
1
Risk-neutral measures make it easy to
express the value of a derivative in a
formula. Suppose at a future time T a
derivative (e.g., a call option on a
stock) pays H_T units, where H_T is a
random variable on the probability
space describing the market. Further
suppose that the discount factor from
now (time zero) until time T is P(0, T).
Then today's fair value of the
https://store.theartofservice.com/the-call-option-toolkit.html
Quantum finance - Quantum continuous model
1
With this new assumption in place, they
derive a quantum finance model as well as
a European call option formula.
https://store.theartofservice.com/the-call-option-toolkit.html
Volatility arbitrage - Overview
Because of the put–call parity, it
doesn't matter if the options traded
are call option|calls or put
option|puts
1
https://store.theartofservice.com/the-call-option-toolkit.html
Volatility arbitrage - Market (Implied) Volatility
For example, assume a call option is
trading at $1.90 with the underlier's price
at $45.50 and is yielding an implied
volatility of 17.5%
1
https://store.theartofservice.com/the-call-option-toolkit.html
Long (finance)
1
An Option_(finance)|options investor goes
long on the Underlying|underlying
instrument by buying call options or writing
put options on it.
https://store.theartofservice.com/the-call-option-toolkit.html
Marketable securities
A 'security' is a tradable financial asset of any kind.The United States
Securities Exchange Act of 1934 defines a security as: Any note, stock,
treasury stock, Government investment|bond, debenture, certificate of
interest or participation in any profit-sharing agreement or in any oil, gas, or
other mineral royalties|royalty or lease, any collateral (finance)|collateral
Trust certificate (finance)|trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit, for a security, any put option|put, call option|call,
straddle, option (finance)|option, or group or index of securities (including
any interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national Exchange (organized
market)|securities exchange relating to Currency|foreign currency, or in
general, any Financial instrument|instrument commonly known as a
security; or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, or warrant or right to subscribe to or purchase, any
of the foregoing; but shall not include currency or any note, draft, bill of
exchange, or banker's acceptance which has a Maturity (finance)|maturity at
the time of issuance of not exceeding nine months, exclusive of days of
grace, or any renewal thereof the maturity of which is likewise limited
1
https://store.theartofservice.com/the-call-option-toolkit.html
Compensation in the United States - Employee stock options
Employee stock
options[http://www.esopdirect.com/faq.htm
l see Employee Stock Option FAQ's] are
call options on the common stock of a
company
1
https://store.theartofservice.com/the-call-option-toolkit.html
Long/short equity
'Long/short equity' is an investment
strategy generally associated with
hedge funds, and more recently certain
progressive traditional asset managers.
It involves buying long equities that are
expected to increase in value and
selling short equities that are expected
to decrease in value. This is different
from the risk reversal strategies where
investors will simultaneously buy a call
option and sell a put option to simulate
being long in a stock.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Vedanta Resources - Zinc
Hindustan Zinc Ltd: HZL is
headquartered in Udaipur in the state
of Rajasthan. HZL’s equity shares are
listed and traded on the NSE and BSE.
Sterlite owns 64.9% of the share
capital in HZL and has management
control. Sterlite has a call option to
acquire the government of India’s
remaining ownership interest.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Implied volatility - Example
A call option is trading at $1.50 with the
underlying trading at $42.05. The implied
volatility of the option is determined to be
18.0%. A short time later, the option is
trading at $2.10 with the underlying at
$43.34, yielding an implied volatility of
17.2%. Even though the option's price is
higher at the second measurement, it is
still considered cheaper based on volatility.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Implied volatility - Example
1
The reason is that the underlying needed to hedge
the call option can be sold for a higher price.
https://store.theartofservice.com/the-call-option-toolkit.html
Shareholders' agreement
By putting put and call options in a
shareholders' agreement, the parties can
ensure that a dissenting minority can be
bought out at a fair value without
destroying the company.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Parity
* Put–call parity, in financial
mathematics, defines a relationship
between the price of a European call
option and a European put option
1
https://store.theartofservice.com/the-call-option-toolkit.html
Bond option
1
Generally, one buys a call option on the bond
if one believes that interest rates will fall,
causing an increase in bond prices. Likewise,
one buys the put option if one believes that
the opposite will be the case. [http://financialdictionary.thefreedictionary.com/Bond%2bopti
on] One result of trading in a bond option, is
that the price of the underlying bond is locked
in for the term of the contract, thereby
reducing the credit risk associated with
fluctuations in the bond price.
https://store.theartofservice.com/the-call-option-toolkit.html
Bond option - Embedded options
1
*Callable bond: allows the issuer to
buy back the bond at a predetermined
price at a certain time in future. The
holder of such a bond has, in effect,
sold a call option to the issuer.
Callable bonds cannot be called for
the first few years of their life. This
period is known as the lock out
period.
https://store.theartofservice.com/the-call-option-toolkit.html
Bond option - Relationship with caps and floors
1
European Put options on zero coupon
bonds can be seen to be equivalent to
suitable caplets, i.e. interest rate cap
components, whereas call options can
be seen to be equivalent to suitable
floorlets, i.e. components of interest
rate floors. See for example Brigo and
Mercurio (2001), who also discuss
bond options valuation with different
models.
https://store.theartofservice.com/the-call-option-toolkit.html
Hybrid security - Traditional hybrids
1
In addition, some of these securities
include minimum and maximum
conversion terms, effectively giving the
holder a put and call option if the share
price reaches a certain prices.
https://store.theartofservice.com/the-call-option-toolkit.html
Greeks (finance) - Practical use
For a vanilla option, delta will be a
number between 0.0 and 1.0 for a long
Call option|call (or a short put) and
0.0 and −1.0 for a long Put option|put
(or a short call); depending on price, a
call option behaves as if one owns 1
share of the underlying stock (if deep
in the money), or owns nothing (if far
out of the money), or something in
between, and conversely for a put
1
https://store.theartofservice.com/the-call-option-toolkit.html
Greeks (finance) - Practical use
1
For example, if a portfolio of 100 American
call options on XYZ each have a delta of
0.25 (=25%), it will gain or lose value just
like 25 shares of XYZ as the price
changes for small price movements
https://store.theartofservice.com/the-call-option-toolkit.html
Potential future exposure - Relevance
1
When the rare event occurs, the person
(or more likely her employer) who wrote
the insurance (or in options terminology the person who was short (finance)|short a
put option|put or call option|call / shorted
volatility (finance)|volatility / was short
gamma) sustains massive losses and may
go bankrupt
https://store.theartofservice.com/the-call-option-toolkit.html
Myron Scholes
The model provides a conceptual
framework for valuing Option
(finance)|options, such as call
option|calls or put option|puts, and is
referred to as the Black–Scholes
model.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Options Clearing Corporation
1
Under its SEC jurisdiction, OCC clears
transactions for put and call option
(finance)|options on common stock and
other equity issues, stock Index
(economics)|indexes, foreign currencies,
interest rate composites and single-stock
futures
https://store.theartofservice.com/the-call-option-toolkit.html
Covered warrant - Structure and features
1
A covered warrant gives the holder the
right, but not the obligation, to buy (Call
option|call warrant) or to sell (Put
option|put warrant) an underlying asset at
a specified price (the strike or exercise
price) by a predetermined date
https://store.theartofservice.com/the-call-option-toolkit.html
Garman–Kohlhagen model - Example
This type of contract is both a call
option|call on dollars and a put
option|put on Pound sterling|sterling,
and is typically called a GBPUSD put,
as it is a put on the exchange rate;
although it could equally be called a
USDGBP call.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Garman–Kohlhagen model - Terms
1
* Call option – the right to
buy an asset at a fixed
date and price.
https://store.theartofservice.com/the-call-option-toolkit.html
Garman–Kohlhagen model - Terms
1
For example, a call option on oil allows the
investor to buy oil at a given price and
date. The investor on the other side of the
trade is in effect selling a put option on the
currency.
https://store.theartofservice.com/the-call-option-toolkit.html
Garman–Kohlhagen model - Valuation: the Garman–Kohlhagen model
1
Then the domestic currency value of a call option
into the foreign currency is
https://store.theartofservice.com/the-call-option-toolkit.html
Cazenove (stock broker) - Merger with JPMorgan Chase
In November 2004, Cazenove and
JPMorgan Chase announced an
agreement that JP Morgan would buy a
50% stake in Cazenove and merge UK
investment banking operations, with a call
option to buy the remaining 50% stake
within five years.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Put-call parity
In financial mathematics, 'put–call
parity' defines a relationship between
the price of a European call option and
European put option, both with the
identical strike price and expiry, namely
that a portfolio of long a call option and
short a put option is equivalent to (and
hence has the same value as) a single
forward contract at this strike price and
expiry
1
https://store.theartofservice.com/the-call-option-toolkit.html
Put-call parity - Derivation
1
We will suppose that the put and call
options are on traded stocks, but the
underlying can be any other tradeable
asset. The ability to buy and sell the
underlying is crucial to the no
arbitrage argument below.
https://store.theartofservice.com/the-call-option-toolkit.html
Put-call parity - Derivation
1
Consider a call option and a put option
with the same strike K for expiry at the
same date T on some stock S, which
pays no dividend. We assume the
existence of a Bond (finance)|bond that
pays 1 dollar at maturity time T. The
bond price may be random (like the
stock) but must equal 1 at maturity.
https://store.theartofservice.com/the-call-option-toolkit.html
Put-call parity - Derivation
1
Let the price of S be S(t) at time t. Now
assemble a portfolio by buying a call
option C and selling a put option P of
the same maturity T and strike K. The
payoff for this portfolio is S(T) - K.
Now assemble a second portfolio by
buying one share and borrowing K
bonds. Note the payoff of the latter
portfolio is also S(T) - K at time T,
since our share bought for S(t) will be
worth S(T) and the borrowed bonds
will be worth K.
https://store.theartofservice.com/the-call-option-toolkit.html
Binomial options pricing model - STEP 2: Find Option value at each final node
1
:Extreme value|Max [ (S_nK), 0 ], for a call option
https://store.theartofservice.com/the-call-option-toolkit.html
Annual Percentage Rate - Not a comparable standard
In effect, the lease includes a put
option back to the manufacturer (or,
alternatively, a call option for the
consumer), and the value (or cost) of
this option to the consumer is not
transparent.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Callable bond
1
The price behaviour of a callable bond
is the opposite of that of puttable bond.
Since call option and put option are
not mutually exclusive, a bond may
have both options
embedded.[http://nd.edu/~zda/Teac
hingNote_ConvertibleBonds.pdf
Teaching Note on Convertible Bonds]
https://store.theartofservice.com/the-call-option-toolkit.html
Callable bond - Pricing
* Price of a callable bond is always
lower than the price of a straight bond
because the call option adds value to
an issuer.[http://www.ambassadorcapital.com/def/CallableBonds.htm
Callable Bonds]
1
https://store.theartofservice.com/the-call-option-toolkit.html
Turbo warrant
1
For comparison, a regular call option will
have a positive value at expiry whenever
the spot price settles above the strike
price. A turbo will have a positive value at
expiry when the spot settle above the
strike AND the spot has never fallen below
the strike during the life of the option (if it
had done so the option would have
crossed the barrier (=strike) and would
have become worthless).
https://store.theartofservice.com/the-call-option-toolkit.html
Straddle - Long straddle
A long straddle involves going long,
i.e., purchasing, both a call option and
a put option on some stock, interest
rate, index (economics)|index or
other underlying
1
https://store.theartofservice.com/the-call-option-toolkit.html
Straddle - Long straddle
1
If the price goes down, he uses the
put option and ignores the call
option
https://store.theartofservice.com/the-call-option-toolkit.html
Straddle - Long straddle
If the stock is sufficiently volatile and
option duration is long, the trader could
profit from both options. This would require
the stock to move both below the put
option's strike price and above the call
option's strike price at different times
before the expiry date.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Constant elasticity of variance model - Dynamic
1
Further Results of the Constant Elasticity of
Variance Call Option Pricing Model
https://store.theartofservice.com/the-call-option-toolkit.html
Fund derivative - Types
1
Typical fund derivatives might be a
call option on a fund, a CPPI on a
fund, or a leveraged note on a fund
https://store.theartofservice.com/the-call-option-toolkit.html
Real estate derivative - Call
1
With the real estate call option, property
owner can sell an option in exchange for
debt-free cash today. Investor, who buys
the real estate call option benefits from
property price appreciation and price
volatility.
https://store.theartofservice.com/the-call-option-toolkit.html
Coherent risk measure - Properties
1
That is, if portfolio Z_2 always has better
values than portfolio Z_1 under almost
surely|almost all scenarios then the risk of
Z_2 should be less than the risk of Z_1.
E.g. If Z_1 is an in the money call option
(or otherwise) on a stock, and Z_2 is also
an in the money call option with a lower
strike price.
https://store.theartofservice.com/the-call-option-toolkit.html
Exercise (options)
1
When exercising a call option, the owner
of the option purchases the underlying
shares (or commodities, fixed interest
securities, etc.) at the strike price from the
option seller, while for a put option, the
owner of the option sells the underlying to
the option seller, again at the strike price.
https://store.theartofservice.com/the-call-option-toolkit.html
Exercise (options) - Exercise Considerations
# For an American-style call option,
'early exercise' is a possibility whenever
the benefits of being long the underlier
outweigh the cost of surrendering the
option early. For instance, on the day
before an ex-dividend date, it may make
sense to exercise an equity call option
early in order to collect the dividend. In
general, equity call options should only
be exercised early on the day before an
ex-dividend date, and then only for deep
Moneyness|in-the-money options.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Exercise (options) - Early Exercise Strategy
1
A common strategy among professional
option traders is to sell large quantities of
in-the-money calls just prior to an exdividend date. Quite often, nonprofessional option traders may not
understand the benefit of exercising a call
option early, and therefore may
unintentionally forgo the value of the
dividend. The professional trader may
only be 'assigned' on a portion of the
calls, and therefore profits by receiving a
dividend on the stock used to hedge the
calls that are not exercised.
https://store.theartofservice.com/the-call-option-toolkit.html
Options strategies
1
Options strategies allow to profit from
movements in the underlying that are
bullish, bearish or neutral. In the case
of neutral strategies, they can be
further classified into those that are
bullish on volatility and those that are
bearish on volatility. The option
positions used can be long
(finance)|long and/or short
(finance)|short positions in call
https://store.theartofservice.com/the-call-option-toolkit.html
Options strategies - Neutral or non-directional strategies
*Collar (finance)|Collar - buy the
underlying and then simultaneous buying
of a put option below current price (floor)
and selling a call option above the current
price (cap).
1
https://store.theartofservice.com/the-call-option-toolkit.html
Options strategies - Neutral or non-directional strategies
*Jade Lizard option strategy|Jade
Lizard - a bull vertical spread created
using call options, with the addition of
a put option sold at a strike price
lower than the strike prices of the call
spread in the same expiration cycle.
1
https://store.theartofservice.com/the-call-option-toolkit.html
Risk metric - Risk measure and risk metric
1
* Calculate the implied volatility of the stock from
some specified call option on the stock.
https://store.theartofservice.com/the-call-option-toolkit.html
Extendible bond
'Extendible bond' (or extendable
bond[http://www.investorwords.com/72
82/extendable_bond.html extendable
bond]) is a complex bond with the
embedded option for a holder to extend
its maturity date by a number of
years.[http://lexicon.ft.com/term.asp?t
=extendable-bond Financial Times
Lexicon][http://classes.uleth.ca/200803
/mgt3412a/ch02.ppt Investment
Alternatives] Such a bond may be
considered as a portfolio of a straight,
shorter-term bond and a call option to
buy a longer-term bond
1
https://store.theartofservice.com/the-call-option-toolkit.html
Notional amount - Equity options
1
So, for instance, if you purchase a 100 share
equity call option with a strike of $60 for a
stock that is currently trading at $60, then you
have the same upside potential as someone
who holds $6,000 of stock (1 option * 100
multiplier * $60), but you may have paid only
$5/share (for a total of $500), so by this
measure you have achieved Leverage
(finance)|leverage of $6,000/$500 = 12x.A
different measure of leverage would be your
Delta (finance)|Delta
https://store.theartofservice.com/the-call-option-toolkit.html
Notional amount - Foreign Currency/Exchange or FX derivatives
Suppose you have a call option on
USD/JPY struck at 110, and you buy one
of these. Then this gives you the option to
pay 100 USD and receive 110 x 100 =
11,000 JPY, so the USD notional is 100
USD, and the JPY notional is 11,000 JPY.
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Puttable bond
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The price behaviour of puttable bonds is
the opposite of that of a callable bond.
Since call option and put option are not
mutually exclusive, a bond may have both
options
embedded.[http://nd.edu/~zda/TeachingNo
te_ConvertibleBonds.pdf Teaching Note
on Convertible Bonds]
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Constant proportion portfolio insurance
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provide a capital guarantee against
downside risk. The outcome of the
CPPI strategy is somewhat similar to
that of buying a call option, but the
strategy does not make use of option
contracts.
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Risk reversal - Risk Reversal investment strategy
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Then as the stock goes up in price, the call
option will be worth more, and the put
option will be worth
less.http://www.quantprinciple.com/invest/i
ndex.php/docs/quant_strategies/riskrevers
al/ Theory of Risk Reversal
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Dynamic Hedging - Insurance
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For example, bonds and equities can
be used to replicate a call option. The
call option can then be easily valued as
the value of the bond/equity portfolio,
hence not requiring one to value the
call option directly.
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Options (finance) - According to the option rights
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* Call options give you the right but not the
obligation, to buy something at a specific
price for a specific time period.
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Frecuencia Latina - 2012-present: New shareholders
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In September, he acquired the shares that
belonged to the Winter brothers in a
liquidation resulting from a long judicial
process, and immediately afterwards
Enfoca Inversiones exercised a call option
to acquire them thus controlling all the
outstanding shares of the company
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ICICI Lombard - Specific services
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ICICI Lombard was amongst the first
general insurance companies in India
to engage in telemarketing . However
in recent times, public outburst
against pushy and intrusive
telecalling in general has led to a
reduction in cold calling. Also, the
introduction of 'do-not-call' (opt-out)
lists is similar to the US 'Do Not Call
Registry'. The firm has a Do Not Call
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Intrinsic theory of value
# For call options, this is the difference
between the underlying stock's price and
the strike price. For put options, it is the
difference between the strike price and the
underlying stock's price. In the case of
both puts and calls, if the respective
difference value is negative, the instrinsic
value is given as zero.
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African Investment Bank - Capital
The authorized capital stock shall be
divided into paid in capital|paid-in shares
and call option|callable shares
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Union Bank of Switzerland - Long-Term Capital Management
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Union Bank of Switzerland sold LTCM
a 7-year option style|European call
option on 1million shares in LTCM,
then valued at about US$800million
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Ferrovial - History
In 2006, a Ferrovial-led consortium purchased the British
company BAA Limited, for
£10bn[http://news.bbc.co.uk/2/hi/business/5050626.stm BAA
agrees to Ferrovial takeover] and BAA sold its stake in Bristol
airport to Macquarie
Airports.[http://uk.reuters.com/article/basicIndustries/idUKL30
69721820061201 Ferrovial Sells Bristol Airport Stake to
Macquarie] Then in 2007, Ferrovial finalised the sale of its
stake in Sydney Airport and MAp exercised its call option on
Ferrovial Airports' 20.9% stake in Sydney Airport for the
agreed price of A$1.009
bn.[http://www.ferrovial.com/en/index.asp?MP=18MS=338MN
=2id=1164 Ferrovial sells Sidney airport] Also in 2007
Ferrovial sold Budapest Airport to a consortium led by
Hochtief AirPort GmbH for £1.3bn
http://www.ferrovial.com/en/PressRoom/Announcements/BAA-announces-sale-of-BudapestAirport-1309-billion and announced changes in its corporate
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structure
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m/the-call-option-toolkit.html
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