Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.1
Options Markets
Chapter 6
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.2Assets Underlying
Exchange-Traded Options
Page 151-2
Stocks
Foreign Currency
Stock Indices
Futures
Commodities
etc
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.3
Specification of,Plain-Vanilla”
Exchange-Traded Options
Expiration date
Strike price
Style (European or American)
Class (Call or Put)
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.4
Terminology (page 154)
Moneyness,
–At-the-money option(平值 )
–In-the-money option(实值 )
–Out-of-the-money option(虚值 )
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.5
Terminology
(continued)
Option class
Option series
Intrinsic value
Time value
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.6
Dividends & Stock Splits
(Page 155-6)
Suppose you own N options with a strike price
of X,
– NO adjustments are made to the option
terms for cash dividends
– When there is an n-for-m stock split,
the strike price is reduced to mX/n
the no,of shares in one contract is
increased to nN/m (Example 6.1)
– Stock dividends are handled in a manner
similar to stock splits
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.7
Dividends & Stock Splits
(continued)
Consider a call option to buy 100
shares of XYZ for $20/share
How should terms be adjusted:
–for a $0.50/share cash dividend?
–for a 2-for-1 stock split?
–for a 5% stock dividend?
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.8
Organization of Trading
Types of
traders:
– Market
makers
– Floor
brokers
Alternative systems
for limit orders
– Order book officials
– Specialists
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.9
Margins,Naked
Margins are required when options are SOLD (written)
--The initial margin is 50% of the value of the shares
-- The maintenance margin is 25%
When a naked option (whose position is not combined
with an offsetting position in the underlying stock) is
written,the margin is the greater of:
1,A total of 100% of the proceeds of the sale plus 20%
of the underlying share price less the amount (if any)
by which the option is out of the money
2,A total of 100% of the proceeds of the sale plus 10%
of the underlying share price
Example 6.3 (Page 161)
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.10
Margins,Covered Calls
No Margin is required for the options.
This is because the shares are already owned.
The minimum cash outlay to set up a
covered call is
The margin for the stock is 50%
Less the proceeds from the sale of the options
Plus the extent (if any) that the options are ITM
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.11
Warrants
Warrants are options that are issued (or
written) by a corporation or a financial
institution,They are added to the bond
issue to make it more attractive to investors
The number of warrants outstanding is
determined by the size of the original issue
and only changes
when they are exercised or
when they expire
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.12
Warrants (continued)
Warrants are traded in the same way
as stocks
The issuer settles up with the holder
when a warrant is exercised
When call warrants are issued by a
corporation on its own stock,exercise
will lead to new treasury stock (库存股票 )
being issued
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.13
Executive Stock Options
Call options issued by a company to
executives to motivate them to act in the best
interests of the company’s shareholders.
When the option is exercised the company
issues more stock
Usually at-the-money when issued
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.14
Executive Stock Options
（ continued）
They become vested (归属 ) after a
period of time
They cannot be sold
They often last for as long as 10 or 15
years
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.15
Convertible Bonds
Convertible bonds (a.k.a,convertibles)
are regular bonds that can be
exchanged for equity
at certain times in the future according
to a predetermined exchange ratio
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.16
Convertible Bonds
(continued)
Very often a convertible is callable
The call provision is a way in which
the issuer can force conversion at a
time earlier than the holder might
otherwise choose
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.17
Reading Quotes from the WSJ
(page 156)
---Call--- ---Put---
Option/Strike Exp Vol Last Vol Last
BrianInc 50 Sept …,…,235 5/16
64 60 Aug 577 3 7/8 220 1/4
64 60 Sept 121 5 1/4 21 1 1/2
64 65 Aug 984 3/4 381 2
64 65 Sept 253 2 1/2 42 3 5/8
64 70 Aug 362 1/8 …,…,
64 70 Sept 241 7/8 24 7
Options,Futures,and Other Derivatives,4th edition? 2000 by John C,Hull
Tang Yincai,Shanghai Normal University
6.18
Assignments
6.1,6.2,6.3,6.5,6.7,6.10,6.11,6.12,
6.13