Chapter 14 Options Markets: provide a background on options, explain why stock option premiums vary, explain how stock options are used to speculate, explain how stock options are used to hedge, explain the use of stock index options, explain the use of options on futures. | 1 1 ■ provide a background on options ■ explain why stock option premiums vary ■ explain how stock options are used to speculate ■ explain how stock options are used to hedge ■ explain the use of stock index options ■ explain the use of options on futures 14 Options Markets Chapter Objectives 2 2 Background on Options Call Option: right to buy underlying financial instrument at exercise price (or strike price) within a specified period of time. In the money when market price > exercise price At the money when market price = exercise price Out of the money when market price exercise price 3 Background on Options Comparison of Options and Futures To obtain an option, a premium must be paid in addition to the price of the financial instrument. The owner of an option can choose to let the option expire on the expiration date without exercising it. Institutional Use of Options Although options positions are sometimes taken by financial institutions for speculative purposes, they are more commonly used for hedging. 4 Exhibit Institutional Use of Options Markets 5 Background on Options Markets Used to Trade Options The Chicago Board Options Exchange (CBOE), created in 1973, is the most important exchange for trading options. Options are also traded at the CME Group. As the popularity of stock options increased, various stock exchanges began to list options. Listing Requirements - One key requirement is a minimum trading volume of the underlying stock. Role of the Options Clearing Corporation - serves as a guarantor on option contracts traded in the United States. Regulation of Options Trading – SEC and others. 6 Background on Options How Option Trades Are Executed Computer technology allows . | 1 1 ■ provide a background on options ■ explain why stock option premiums vary ■ explain how stock options are used to speculate ■ explain how stock options are used to hedge ■ explain the use of stock index options ■ explain the use of options on futures 14 Options Markets Chapter Objectives 2 2 Background on Options Call Option: right to buy underlying financial instrument at exercise price (or strike price) within a specified period of time. In the money when market price > exercise price At the money when market price = exercise price Out of the money when market price exercise price 3 Background on Options Comparison of Options and Futures To obtain an option, a premium must be paid in addition to the .
