Page 237 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Questions
1. Do you think that the Helios was adding more functionality and features to their
existing trading portfolio? Why/why not?
2. Do you justify the solution given by Jensen? Why/why not?

Source: www.russoft.org

Options undertakings

Stocks
Foreign Currencies
Stock Indices
Commodities

Others: Futures Options, are options on the futures contracts or underlying assets are futures
contracts. The futures contract generally matures shortly after the options expiration

Options are often classified as

In the money: These result in a positive cash flow towards the investor.
At the money: These result in a zero-cash flow to the investor.

Out of money: These result in a negative cash flow for the investor.

What are naked and covered options?
Did u know?
Naked Options: These are options that are not combined with an offsetting contract to
cover the existing positions.

Covered Options: These are option contracts in which the shares are already owned by an
investor (in case of covered call options) and in case the option is exercised then the
offsetting of the deal can be done by selling these shares held.
Options Pricing Model

Prices of options commonly depend upon six factors. Unlike futures, which derive their prices
primarily from prices of the undertaking, options’ prices are far more complex. The table below
helps to understand the effect of each of these factors and gives a broad picture of option pricing
keeping all other factors constant. The table presents the case of European as well as American
Options.
Effect of Increase in the Relevant Parameter on Option Prices

Spot prices: In case of a call option the pay-off for the buyer is max (S – X , 0) therefore, more the
t
Spot Price more is the pay-off and it is favourable for the buyer. It is the other way round for the
seller, more the Spot Price higher are the chances of his going into a loss.

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