LESSON 13

OPTIONS OVERVIEW
 With options, one pays money to have a choice in the future
 Kinds of option : calls (a right to buy, specified in the contract at a predetermined
price, uncommitted to buy) & puts (a right to sell)
 Calls berbeda dengan forward contract, karena kalau forward : having the option to
buy dan committed to buy
 Ketika option dibeli, buyer dari option compensated the seller (disebut juga writer
dari option). Writer option sekarang subject dari choice in the future
 Essence dari option : bukan free will. Orang beli pada tanggal dan harga tertentu
kalau option tersebut < harga beli di open market. Karna bisa dapet profit dari jual di
open market
 Contract of the option ada term : exercise date / strike date (date when the option
expires harus buy if it’s a call/ sell if it’s a put), ada definisi objeknya apa dan berapa
banyak kalo shares

READING OPTIONS PRICING

 Ticker : abbreviation for the company name which is used in financial reporting
 Kalau option (di option market) cuma bayar $2.36 padahal harga per share nya $31.
Jadi kalau tau2 turun tidak akan rugi
 Jangan exercise options early, karena punya option value. Option value : value that
you get the upside without so much downside
 Bid ask spread : asking 15 cents more, cara dealer making money. Mau jual, dealer
offer $6.05. Mau beli, harga option nya $6.20.
 Ask : price to purchase an option
 Bid : price to sell the option back to the dealer
 Last : last price the option was sold for

WHY OPTIONS EXIST

 Major source of economic inefficiency is cured by options market
 Trade the risk in order to reduce the risk. Risk that a stock will go up abpve the strike
price, will go above another strike price, etc
 Behavioral finance : pay attention to salient things, overreact to the news.
 Options : insurance to a stock. Stock price might fall. Buy a put option on the shares i
own, strike way below the current price of stock. If the stock fails below that, can
exercise the option and sell at the option price

UBIQUITY OF OPTIONS
 Recourse state : buy a house and take out a mortgage to borrow, then stop paying.
Can garnish paycheck, do legal proceeding to make you pay
 Non recourse state : fail to pay, just evict and take the house but cannot go any
further. Really an option of sorts
  Investment derivatives : risky, might be subject to crashes in a crisis. Increased so
rapidly, regulators weren’t up to date on all the issues

PUT / CALL PARITY

 Value of the option (intrinsic value) : call option. Jika call option dan hari terakhir,
exercise/forget it. Harga $20. Kalau harga stock sekarang < $20, option worthless.
 Jika money on the last day, exercise day, option worth the difference between the
stock price and the option price. Kalau harga stock $25, maka exercise dan jual
stocknya, karna dapet $5.
 Puts option. Exercise jika option price < stock price.

 Parity relations : relations holds quite well if you do it exactly right in the options
market.
 Price of an option on the last day : intrinsic value
 Price of an option before last day : worth more than intrinsic value, karna ada option
value
 No arbitrage : no sure profits
 If the stock price fall below the exercise price, lose the full amount if you own the
stock. But when own the option, still got something (option value)

USING OPTIONS TO HEDGE

 Stop loss order : insure yourself against losses on the stocks
 Sell if the stock falls under certain amount (ditentukan sendiri)
 Kalau stop loss oder, misal jual pas di bawah $20. Pas $19 dijual, kemudian besoknya
naik jadi $21, terus beli lagi. Kehilangan $2
 Harus compare option price sama losses di stop loss order