Mechanics of Options

Mechanics of Options

1. Prelims

   • Types of option
   • Option positions
   • Characterising options
   • Lingo

2. Value of options

   • Intrinsic value
   • European vs. American

3. European option prices

   • Lower bound for a call option (w and w/o dividends)
   • Lower bound for a put option (w and w/o dividends)
   • Arbitrage opportunities??
   • Put-call parity
     • Useful for finding an unknown

4. To exercise an option or not?

   • Profiting
   • Minimising losses
   • Early exercise (American only)?
     • Usually some chance/motivation to do so
       • Exception (i.e. never exercise early)?
         • American call option on a non-dividend paying stock