New PDF release: An introduction to options trading

By Frans de Weert

ISBN-10: 0470029706

ISBN-13: 9780470029701

ISBN-10: 0470034564

ISBN-13: 9780470034569

Explaining the speculation and perform of concepts from scratch, this ebook makes a speciality of the sensible aspect of innovations buying and selling, and bargains with hedging of concepts and the way techniques investors become profitable through doing so.  universal phrases in alternative conception are defined and readers are proven how they relate to profit.  The e-book supplies the mandatory instruments to accommodate strategies in perform and it contains mathematical formulae to boost motives from a superficial level.  in the course of the ebook real-life examples will illustrate why traders use alternative constructions to fulfill their wishes.

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Extra resources for An introduction to options trading

Sample text

Interest rate. Suppose that the interest rate given on a savings account is 5% per year. Consider a put option with a time to maturity of 1 year, and, given an interest rate of 5%, the price of this option is $10. Since the holder of the short position in this option gets this $10, he can put this money in a savings account, getting a 5% interest rate. By doing so he will have $10:5 (10 Ã 1:05) at the expiration date of the option. Since the price of the option is fair, the expected payoff for the holder of the long position in the option will also be $10:5.

The put–call parity for non-dividend paying stocks states: ct À pt ¼ St À KeÀrðTÀtÞ ð3:12Þ The forward of a non-dividend paying stock is F ¼ St erðTÀtÞ , which shows that if the strike price for both the call and the put is the forward price the call minus the put, the synthetic, is worth 0. In the same way this can be proved for options on dividend paying stocks. However, in this case the put–call parity is: ct À pt ¼ St À K eÀðrÀdÞðTÀtÞ ð3:13Þ where d is the dividend yield. In practice, one would only see synthetic forwards on specific strikes, not necessarily on the forward price.

Lastly, it is worth mentioning that it is possible to short (sell) a stock without actually owning it. It basically comes down to borrowing a stock from a third party after which the stock is sold immediately. However, this stock has to be returned sometime. For example, an investor shorts the stock Unilever for $50. Because the investor sells the stock Unilever he gets the $50. If after 1 year the stock price of Unilever is $40 he can decide to buy the stock on the market for $40 and return it to the party he borrowed it from.

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An introduction to options trading by Frans de Weert

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