Thị trường tài chính và các định chế tài chính_ Chapter 14

Chapter Outline Background on options  Speculating with stock options  Determinants of stock option premiums  Explaining changes in option premiums  Hedging with stock options  Usi

Chapter 14

Options Markets

Chapter Outline

 Background on options

 Speculating with stock options

 Determinants of stock option premiums

 Explaining changes in option premiums

 Hedging with stock options

 Using options to measure a stock’s risk

Chapter Outline (cont’d)

 Options on ETFs and stock indexes

 Options on futures contracts

 Hedging with options on futures

 Institutional use of options markets

 Globalization of options markets

Background on Options

 A call option grants the owner the right to purchase a

specified financial instrument for a specified price

(exercise or strike price) within a specified period of

time

 Grants the right, but not the obligation, to purchase the specified investment

 The writer of a call option is obligated to provide the instrument

at the price specified by the option contract if the owner

exercises the option

 A call option is:

 In the money when the market price of the underlying security

exceeds the strike price

Background on Options (cont’d)

specified financial instrument for a specified

price within a specified period of time

 Grants the right, but not the obligation, to sell the

specified investment

 A put option is:

 In the money when the market price of the underlying security is below the strike price

 At the money when the market price is equal to the strike price

 Out of the money when the market price is above the strike

Background on Options (cont’d)

 Call and put options specify 100 shares for stocks

 Premiums paid for call and put options are determined through open outcry on the exchange floor

 Participants can close out their option positions by taking

an offsetting position

 The gain or loss is determined by the premium paid when

purchasing the option and the premium received when selling the option

 American-style options can be exercised at any time

prior to expiration

 European-style options can be exercise only just before

Background on Options (cont’d)

 Is the most important exchange for trading options

 Serves as the market for options on more than 1,500 different stocks

 Lists standardized options

 Accounts for about 51 percent of all option trading

 Options are also traded on the AMEX, Philadelphia Stock Exchange, Pacific Stock Exchange, and the

International Securities Exchange

Background on Options (cont’d)

 Listing requirements

 Each exchange has its own requirements

 One key requirement is a minimum trading volume of the underlying stocks

 Role of the Options Clearing Corporation (OCC)

 The OCC serves as a guarantor on option contracts traded in the U.S

 Regulation of options trading

 The SEC and the various option exchanges regulate option trading

 Regulations:

 Are intended to ensure fair and orderly training

Background on Options (cont’d)

 Floor brokers execute transactions desired by

investors

 Some orders are executed electronically without a floor broker

 Market-makers:

 Can execute stock option transactions for customers

 Trade options on their own account

 May facilitate a buy order for one customer and a sell order for a different customer

 Earn the difference between the bid price and the ask price for the option

Background on Options (cont’d)

 Types of orders

purchase or sale of an option at the prevailing market price

only if the market price is no higher or lower than a specified price limit

 Many online brokerage firms, like E*Trade and Datek, facilitate options orders

Background on Options (cont’d)

 Stock option quotations

newspapers publish quotations for stock

options (see next slide)

lower call premiums and higher put premiums

option premiums and higher put option

premiums

Background on Options (cont’d)

Strike Exp Vol Call Vol Put

Speculating with Stock Options

 Speculating with call options

 Call options can be used to speculate on the expectation of an increase in the price of the underlying stock

 Assuming that the buyer of the option sells the stock when

exercising the option and that the writer will obtain the stock

only when the option is exercised, the writer’s net gain is the

buyer’s net loss, assuming zero transaction costs

 The maximum loss for the buyer of a call option is the premium, while the maximum gain is unlimited

 The maximum gain for the writer of a call option is the premium, while the maximum loss is unlimited

Speculating with Call Options

Pete expects ABC stock to increase from its current price

of $90 per share He purchases a call option on ABC

stock with an exercise price of $92 for a premium of $4

per share ABC stock rises to $97 prior to the option’s

expiration date If Pete exercises the option and

immediately sells the shares in the market, what is his

net gain from the transaction

?

share per

1

$ 4

$ 92

$ 97

Speculating with Call Options

Speculating with Stock Options

(cont’d)

 Speculating with call options (cont’d)

 Assume that ABC stock has three call options available:

 Call option 1: Exercise price = $87; Premium = $7

 Call option 1: Exercise price = $90; Premium = $5

 Call option 1: Exercise price = $92; Premium = $4

 The risk-return potential varies among the several options that are available

 The contingency graph for all three options is shown on the

next slide

 The graph can be revised to reflect returns for each possible price per share of the underlying stock

Speculating with Stock Options

95

-5 -7

Speculating with Stock Options

(cont’d)

 Put options can be used to speculate on the

expectation of a decrease in the price of the

underlying stock

 The maximum gain for the buyer of a put option is

the exercise price less the premium, while the

maximum loss is the premium

 The maximum loss for the writer of a put option is

the exercise price less the premium, while the

maximum gain is the premium

Speculating with Put Options

Mary expects XYZ stock to decrease from its current price

of $54 Thus, she purchases a put option on XYZ stock

with an exercise price of $53 and a premium of $2 If

the stock price of XYZ stock is $47 when the option

expires, what is Mary’s net gain

?

share per

4

$ 2

$ 47

$ 53

Speculating with Put Options

Speculating with Stock Options

(cont’d)

 Excessive risk from speculation

 Firms should closely monitor the trading of derivative contracts

by their employees to ensure that derivatives are being used

within the firm’s guidelines

 Firms should separate the reporting function from the trading function so that traders cannot conceal trading losses

 When firms receive margin calls on derivative positions, they should recognize that there may be potential losses on their

derivative instruments

Determinants of Stock Option

Premiums

 The option premium must be sufficiently high to

equalize the demand by buyers and the supply that

sellers are willing to sell

 Determinants of call option premiums

 Influence of the market price

 The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the call option premium

 Influence of the stock’s volatility

 The greater the volatility of the underlying stock, the higher the call option premium

 Influence of the call option’s time to maturity

 The longer the call option’s time to maturity, the higher the call option premium

Determinants of Stock Option

Premiums (cont’d)

 Influence of the market price

 The higher the existing market price of the underlying financial instrument relative to the exercise price, the lower the put option premium

 Influence of the stock’s volatility

 The greater the volatility of the underlying stock, the higher the put option premium

 Influence of the put option’s time to maturity

 The longer the call option’s time to maturity, the higher the put option premium

Explaining Changes in Option

Premiums

 Economic conditions and market conditions can cause abrupt changes in the stock rice or in the anticipated

volatility of the stock price

 This would have a major impact on the stock option premium

 Indicators monitored by participants in the option

Hedging with Stock Options

pension funds manage large stock portfolios

and use options on stocks and stock indexes to hedge

 A covered call involves the sale of a call option with

a simultaneous long position in the stock

Writing A Covered Call

Philly Mutual Fund owns 100 shares of ABC stock Philly

believes that the stock price will decline temporarily from

its current price of $90, but does not want to liquidate its

position because of transaction costs Consequently,

Philly writes one call option on ABC stock with an

exercise price of $88 and a premium of $6 Construct a

contingency graph showing Philly’s position with covered

call writing and without covered call writing

.

Writing A Covered Call (cont’d)

With Covered Call Writing 0

3

88 85

Without Covered Call Writing

90

Hedging with Stock Options

(cont’d)

 If an institution with a long position in a stock is

concerned about a decline in the stock price, it

could hedge against a temporary decline by

purchasing put options on that stock

 Put options are typically used to hedge when

portfolio managers are concerned about a

temporary decline in a stock’s value

Using Options to Measure a

Stock’s Risk

market’s anticipation of a stock’s standard

deviation over the life of the option

 The option-pricing model can be used to derive the implied standard deviation of a stock

 The implied standard deviation increases when a

firm experiences an event that creates more

uncertainty

Options on ETFs and Stock

Indexes

specified ETF at a specified price by a

specified expiration date

 Since ETFs are traded like stocks, options on ETFs are traded like options on stocks

 Investors who exercise a call option on an ETF

would receive delivery of the ETF in their account

Options on ETFs and Stock

Indexes (cont’d)

 A stock index option provides the right to trade a

specified stock index at a specified price by a specified expiration date

 Options are offered on the S&P 100 index, the S&P 500 index, S&P SmallCap 600 Index, Dow Jones Industrial Average,

Nasdaq 100 Index, Goldman Sachs Internet Index, among

others

 If an index option is exercised, the cash payment is equal to a

specified dollar amount multiplied by the difference between the index level and the exercise price

 Speculators who anticipate a sharp increase in the stock market would purchase call options on an index

 Speculators who anticipate a decrease in the stock market

ETFs for Which Options Are Traded Indexes for Which Options Are Traded

iShares Nasdaq Biotechnology Asia 25 Index

iShares Goldman Sachs Technology Index Euro 25 Index

iShares Goldman Sachs Software Index Mexico Index

iShares Russell 1000 Index Fund Dow Jones Industrial Average

iShares Russell 1000 Value Index Fund Dow Jones Transportation Average

iShares Russell 1000 Growth Index Fund S&P 100 Index

Energy Select Sector SPDR S&P 500 Index

Financial Select Sector SPDR S&P SmallCap 600 Index

Utilities Select Sector SPDR Nasdaq 100 Index

Options on ETFs and Indexes

(cont’d)

 Hedging with stock index options

 Portfolio managers consider purchasing put options on a stock index to protect against stock market declines

 The put options should be purchased on the stock index that

most closely mirrors the portfolio to be hedged

 The greater the market downturn, the greater the decline in the market value of the portfolio, but the greater the gain from

holding put options on a stock index

 Hedging with long-term stock index options

 Long-term equity anticipations (LEAPs) have expiration dates

at least two years ahead with a lower premium

Options on ETFs and Indexes

(cont’d)

 Dynamic asset allocation with stock index options

 Dynamic asset allocation involves switching between risky and low-risk investment positions over time in response to

Options on ETFs and Indexes

 Impact of the September 11 Crisis on the implied

volatility of stock indexes

 The attacks caused more uncertainty about the future value of stocks

 Implied volatility increased when the markets reopened on September 17

Options on Futures Contracts

to purchase or sell that futures contract for a

specified price within a specified period of time

 Options on futures grant the power to take the

futures position if favorable conditions occur but the flexibility to avoid the future position if unfavorable

conditions occur

 Options are available on stock index futures and on interest rate futures

Options on Futures Contracts

(cont’d)

 Speculation based on an expected decline in

Speculating on a Decrease in

Rates with Options on Futures

Kevin Phelps expects interest rates to decline and purchases a call option on Treasury bond futures with an exercise price

of 92–40 The option has a premium of 2–00 Shortly before

the expiration date, the price of Treasury bond futures rises

to 95–00 Kevin exercises the option and closes out the

position by selling an identical futures contract What it is net

gain from this strategy

?

%75.18375

$ROI

375

$000,2

$625,92

$000,95

$gainNet

Options on Futures Contracts

(cont’d)

 Speculation based on an expected increase in

interest rates

 Speculators who expect interest rates to increase could purchase a put option on Treasury bond futures

 If interest rates rise, the speculator can exercise the option

to sell futures at the exercise price and purchase futures at

a lower price than the price at which they sold futures

 If interest rates decline, the speculators will let the options expire

 Speculators who anticipate an increase in interest rates may consider selling call options on Treasury bond futures

Speculating on an Increase in

Rates with Options on Futures

Barnie Blythe expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of

98–00 and a premium of 2–00 Just prior to the expiration

date, the price of Treasury bond futures is valued at 94–12

What is Barnie’s net gain from this strategy if he exercises

the option and closes out the position by purchasing an

identical futures contract

?

% 63 90

50 812 ,

1

$ ROI

50 812 ,

1

$ 000

, 2

$ 50 187 ,

94

$ 000 ,

98

$ gain

Hedging with Options on Futures

 Hedging with options on interest rate futures

 Financial institutions commonly hedge bond or mortgage

portfolios using options on interest rate futures

 The position is designed to create a gain that can offset a loss

on the bond or mortgage portfolio

 Put options on futures offer more flexibility than selling futures but require a premium

 Institutions wishing to hedge against interest rate risk should

compare outcomes from selling futures contract versus buying put options on interest rate futures

Hedging with Options on Futures

(cont’d)

 Hedging with options on stock index futures

 The position taken on the options contract is designed to

create a gain that can offset a loss on the stock portfolio

 Determining the degree of the hedge with options on stock

index futures

 The higher the strike price relative to the prevailing index value, the higher the price at which the investor can lock in the sale of the index, but the higher the premium

 Selling call options to cover the cost of put options

 Selling call options can generate some fees to help cover the cost

of purchasing put options