CALLS AND PUTS

GROUP I

CONTENT
INTRODUCTION
DEFINITIONS
INVESTMENT STRATEGIES
SUMMARY

INTRODUCTION
What is an option?
A right, but not obligation, to purchase or sell
something at a certain price in the future.

INTRODUCTION
How call and put options work?
CALL OPTIONS
PUT OPTIONS

DEFINITIONS
STRIKE PRICE
EXERCISE PRICE

The price at which

a specific
derivative contract
can be exercised.
For call options,
the strike price is
where the security
can be bought (up
to the expiration
date), while for
put options the
strike price is the
price at which
shares can be sold

SPOT PRICE
MARKET PRICE

The current price

of the underlying
assets

OPTION PREMIUM
PREMIUM

The current price

of any specific
option contract
that has yet to
expire. For stock
options, the
premium is quoted
as a dollar amount
per share and
most contracts
represent the
commitment of
100 shares.

OPTION PRICING

Intrinsic value
Time value
Volatility

DEFINITIONS
IN-THE-MONEY

AT-THE-MONEY

OUT-OF-THE-MONEY

1. For a call option,

when thestrike price
isbelow the
marketprice of
theunderlying asset.

A situation where
an option'sstrike
priceis identical to
the spot price of
theunderlying
security.

1. For a call option,

when the strike
price isabove the
marketprice of
theunderlying
asset.

2. For aput option,

when the strike price
isabove the
marketprice of the
underlying asset.

2. For aput
option, when the
strike price isbelow
the marketprice of
the underlying
asset.

Proft/Loss

CALL OPTIONS

Out-of-themoney

of
y
a
P
t
fi
o
r
P

Underlying price

In-the-money
At-the-money
(strike price)
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PUT OPTIONS

Proft/Loss

Pr
ofi

Pa
yof

Out-of-themoney
Underlying price
In-the-money
At-the-money
(Strike price)
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DEFINITIONS

AMERICAN OPTIONS

Exercisable at any time during

maturity

EUROPEAN OPTIONS
Exercisable only at expiration date (end of
maturity)

The premium of an
American options is
always higher than
that of an European
option.

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DEFINITIONS

LONG

SHORT

The buying of an options

contract.

The selling of an options contract

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LONG CALLS
The options trader buycall optionswith the belief that the price of
theunderlying securitywill rise significantly beyond the strike price before the
option expiration date.
Example:

Profit
or Loss

Profit/loss

Buying a call
option covering
100 shares
Strike price: $40
Option premium:
$2

$0

$40

Stock price

-$200
Unlimited potential profit
Limited loss

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SHORT CALLS
The options trader sellcall optionsand want the option to expire worthless.

Example:
Selling a call
option covering
100 shares
Strike price: $40
Option premium:
$2

Profit
or Loss

Limited profit
Unlimited loss

$200
$0

$40

Stock price

Profit/loss

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LONG PUTS
The investor buyput optionswith the belief that the price of theunderlying
securitywill go significantly below the striking price before theexpiration date.
Example:
Buying a put
option covering
100 shares
Strike price: $40
Option premium:
$2

Profit
or Loss

$0

Profit/loss

$40

Stock price

-$200
Unlimited potential profit
Limited loss
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SHORT PUTS
The options trader sellput optionsand want the option to expire worthless.

Example:
Buying a call
option covering
100 shares
Strike price: $40
Option premium:
$2

Profit
or Loss

Limited profit
Unlimited loss

$200
$0

$40

Profit/loss

Stock price

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WHY do Investors trade with calls and puts?

LEVERAGE
HEDGE (Investors strategies)

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LEVERAGE
Budget: $ 1,600 | Stock price: $ 160 | Option: Premium = $ 1.60,
Strike = $ 160
Buy 10 stocks

Stock price:
$ 200

OR

- 1,600 Buy
$ stocks for $ 160
+ 2,000 Sell
$ stocks for $ 200
400 $Profit (RR: 25%)

Stock price: - 1,600 Buy

$ stocks for $ 160
$ 120
+ 1,200 Sell
$ stocks for $ 120
- 400 $
Loss (RR: -25%)

Buy 10 call options

(right to buy 1,000
shares)
- 1,600 $ Option premium
- 160,000 Buy
$ stocks for $ 160
+ 200,000 Sell
$ stocks for $ 200
38,400 $
Profit (RR: 2,400%)
- 1,600 $
Option premium

- 1,600 L$oss (RR: -100%)

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QUICK QUIZ
Peter agreed to purchase a call option to buy 100 shares of company X at $80
for $500 of option premium during the following 6 months. Current share price
of company X is $70.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

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ANSWERS
Peter agreed to purchase a call option to buy 100 shares of company X at $80
for $500 of option premium during the following 6 months. Current share price
of company X is $70.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

(1) Premium per share = $500 / 100 = $5

Break-even point = $80 + $5 = $85

(2) The current share price $70 is less than the break-even $85, so he should not exercise .

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QUICK QUIZ
Peter agreed to purchase a put option to buy 100 shares of company X at $80
for $500 of option premium during the following 6 months. Current share price
of company X is $55.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

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ANSWERS
Peter agreed to purchase a put option to buy 100 shares of company X at $80
for $500 of option premium during the following 6 months. Current share price
of company X is $55.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

(1) Premium per share = $500 / 100 = $5

Break-even point = $80 - $5 = $75
(2) The current share price $55 is lower than the break-even $75, so he should exercise .

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Investment Strategies

Protective put

Proft/Loss

Buy a stock and simultaneously purchasing a put option on the stock. With this
strategy you can avoid losing all the money invested in the stock.

Pa
yo
Pu f
Strike
price
t o
n

0$

Pa
y
st of
oc o
k n
Pr
o

fi

Maximum profit = Unlimited

Maximum loss = Premium

Underlying price
100
$

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Investment Strategies

Covered calls

Buy a stock and simultaneously sell a call option. Maximum profit is the strike price
for call, but this strategy allows the investor to boost income by the premium
collected.
Pa
y
st of
oc o
k n

Strike price

Pr
o

Maximum profit = Premium

Maximum loss = Unlimited

fi
t

0$

80$

120
100 $
$

Pa
yo
ca f
ll on

Underlying price
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Investment Strategies

Straddle

Hold a position in both a call and put with the same strike price and expiration date.
Used when you expect large movements in the stock price, but dont know I which
direction.
Ca
l
t
Pu

lo
nl
y

O
y
nl

Strike
price

Pr
o

fi

Maximum profit = Unlimited

Maximum loss = 2xPremium

Underlying price

0$
100
$
80$

120
$

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Quick Quiz
A registered representative has a customer who bought 100 shares
of XYZ stock at $30/share. The stock has appreciated to $40/share in
the past eight months. The investor is confident that the stock is a
good long-term investment with additional upside potential but is
concerned about a near-term weakness in the overall market that
could wipe out his unrealized gains. Which of the following
strategies would probably be the best recommendation for this
customer?
A.Sell calls on the stock
B.Buy calls on the stock
C.Sell puts on the stock
D.Buy puts on the stock

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Answer
A registered representative has a customer who bought 100 shares of XYZ stock at
$30/share. The stock has appreciated to $40/share in the past eight months. The
investor is confident that the stock is a good long-term investment with additional
upside potential but is concerned about a near-term weakness in the overall market
that could wipe out his unrealized gains. Which of the following strategies would
probably be the best recommendation for this customer?
A.Sell calls on the stock
B.Buy calls on the stock
C.Sell puts on the stock
D.Buy puts on the stock

Answer: D.
Explanation: This is a basic strategy question. The customer wishes
to fix, or set, his selling price for the stock. When he buys puts on
the stock, the selling (or delivery) price for the stock is the strike
price of the put until expiration. The long stock position is bullish, so

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Quick Quiz
An investors buys 100 shares of XYZ stock at $30/share and one XYZ 40 put @ 3 to hedge
the position. The stock has appreciated to $40/share in the past eight months. The
investor is confident that the stock is a good long-term investment with additional upside
potential but is concerned about a near-term weakness in the overall market that could
wipe out his unrealized gains.
If XYZ stock drops to $27 and the investor exercises the put, what is the profit or loss on
the
hedged
position?
A) Loss
of $3/share
B) Gain of $4/share
C) Loss of $7/share
D) Gain of $7/share

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Answer
An investors buys 100 shares of XYZ stock at $30/share and one XYZ 40 put @ 3 to hedge
the position. The stock has appreciated to $40/share in the past eight months. The
investor is confident that the stock is a good long-term investment with additional upside
potential but is concerned about a near-term weakness in the overall market that could
wipe out his unrealized gains.
If XYZ stock drops to $27 and the investor exercises the put, what is the profit or loss on
the
hedged
position?
A) Loss
of $3/share
B) Gain of $4/share
C) Loss of $7/share
D) Gain of $7/share

$ Out
$ In
Purchase Price - Exercising the
$30
Put - $40
Put Premium $3
Total Out - $33
Total Gain of $7/share

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Summarize
CALL OPTIONS

1
2
3

Right, but not the obligation, to buy a certain asset at a specific

price within a predetermined time period.
Investors expect stock price to increase (Short call: to decrease)
PUT OPTIONS
Right, but not the obligation, to sell a certain asset at a specific price
within a predetermined time period.
Investors expect stock price to decrease (Short Put: to increase)
REASONS FOR BUYING OPTIONS
1) Hedging
2) Leverage

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THANKS YOU
Q&A

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