This chapter is organized as follows: Section 2 discusses the investment policy statement, a written document that captures the client’s investment objectives and the constraints. Section 3 discusses the portfolio construction process, including the first step of specifying a strategic asset allocation for the client. Section 4 concludes and summarizes the reading. | Chapter 20 Options Markets: Introduction Buy - Long Sell - Short Call Put Key Elements Exercise or Strike Price Premium or Price Maturity or Expiration Option Terminology In the Money - exercise of the option would be profitable. Call: market price>exercise price Put: exercise price>market price Out of the Money - exercise of the option would not be profitable. Call: market priceX 0 if ST exercise price Put: exercise price>market price Out of the Money - exercise of the option would not be profitable. Call: market priceX 0 if ST X 0 if ST X (X - ST) if ST X -(X - ST) if ST < X Profits to Put Writer Payoff + Premium Payoffs and Profits at Expiration - Puts Profit Profiles for Puts 0 Profits Stock Price Put Writer Put Holder Investment Strategy Investment Equity only Buy stock @ 100 300 shares $10,000 Options only Buy calls @ 10 1000 options $10,000 Leveraged Buy calls @ 10 100 options $1,000 equity Buy T-bills @ 2% $9,000 Yield Equity, Options & Leveraged Equity IBM Stock Price $95 $105 $115 All Stock $9,500 $10,500 $11,500 All Options $0 $5,000 $15,000 Lev Equity $9,270 $9,770 $10,770 Equity, Options Leveraged Equity - Payoffs IBM Stock Price $95 .
