Chapter 9
Mechanics of Options
Markets
Options, Futures, and Other Derivatives, 8th Edition,
Copyright © John C. Hull 2012
1
Review of Option Types
A call is an option to buy
A put is an option to sell
A European option can be exercised only at
the end of its life
An American option can be exercised at any
time
Options, Futures, and Other Derivatives, 8th Edition,
Copyright © John C. Hull 2012
2
Option Positions
Long call
Long put
Short call
Short put
Options, Futures, and Other Derivatives, 8th Edition,
Copyright © John C. Hull 2012
3
Long Call
(Figure 9.1, Page 195)
Profit from buying one European call option: option
price = $5, strike price = $100, option life = 2 months
30 Profit ($)
20
10
0
-5
70
80
90
Terminal
stock price ($)
100
110 120 130
Options, Futures, and Other Derivatives, 8th Edition,
Copyright © John C. Hull 2012
4
Short Call
(Figure 9.3, page 197)
Profit from writing one European call option: option
price = $5, strike price = $100
Profit ($)
5
0
110 120 130
70
80
90 100
-10
Terminal
stock price ($)
-20
-30
Options, Futures, and Other Derivatives, 8th Edition,
Copyright © John C. Hull 2012
5
Long Put (Figure 9.2, page 196)
Profit from buying a European put option: option
price = $7, strike price = $70
30 Profit ($)
20
10
0
-7
Terminal
stock price ($)
40
50
60
70
80
Options, Futures, and Other Derivatives, 8th Edition,
Copyright © John C. Hull 2012
90 100
6
Short Put (Figure 9.4, page 197)
Profit from writing a European put option: option price
= $7, strike price = $70
Profit ($)
7
0
40
50
Terminal
stock price ($)
60
70
80
90 100
-10
-20
-30
Options, Futures, and Other Derivatives, 8th Edition,
Copyright © John C. Hull 2012
7
Payoffs from Options
What is the Option Position in Each Case?
K = Strike price, ST = Price of asset at maturity...