OPTIONS TRADING CRASH COURSE by Richardson Robert

Author:Richardson, Robert
Language: eng
Format: epub
Published: 2021-12-31T16:00:00+00:00

Chapter 7: Case Study

Case Study 1

Consider a holder of a European call option on the stock Bills shell with a strike price of $42. Suppose that the current stock price is $40, the expiration date is in 1 year, and the option price is $5. Because the probability is European, it can only be exercised on the expiration date. What are the possible payoffs for this option? If on the expiration date the stock price is less than $42, the holder of this option will clearly not exercise his option right.

For if he did, he would buy the stock for $42 (exercising the option), and would only be able to sell the stock for less than $42 on the market. So, the holder will incur a loss if he exercised his right, while nothing would happen if this right is not exercised by him. To conclude, if the stock price is less than $42 at the expiration date, the option is not exercised by the holder. In these conditions, the loss of the holder is the price charged for the option is $5 in this scenario. If the stock price is set at the expiration date, the holder will exercise his option for between $42 and $47. Right: Suppose, on the expiry date, the stock price is $45, so he buys the option by exercising his choice correctly. Stock for $42, and sells this stock directly on the stock $45 market, making a $3 profit. Nonetheless, take in view of the fact that he paid $5 for the option, he still makes a $2 loss. It is clear that the holder loses up to $47, on the money option. If the stock expires on the expiry date, the price is more than $47, the holder will exercise his right again correct option. The distinction between this case and the situation the previous one is that not only does the holder make a profit, by correctly exercising his decision, he also makes an overall gain. Benefit: Suppose, on the expiry date, the stock price, then his benefit is $2, and $7 from exercising the option is $49. For the option $5 from the price paid. This case demonstrate show the holder of a call profits. The Bills choice varies with the stock price, at ripeness. This case study also points out that the benefit of the holder as the stock price increases, call option increases. Accordingly, the holder of a call option speculates on a growing range of choices per price of a stock.

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