CALLS AND PUTS

GROUP I
CONTENT

INTRODUCTION

DEFINITIONS

INVESTMENT STRATEGIES

SUMMARY

2
 INTRODUCTION

What is an option?
A right, but not obligation, to purchase or sell something
at a certain price in the future.

3
 INTRODUCTION

How call and put options work?

CALL OPTIONS

PUT OPTIONS

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 DEFINITIONS
STRIKE PRICE
EXERCISE PRICE
The price at which a The current price of the
specific derivative
contract can be exercised.
For call options, the strike
price is where the
security can be bought
(up to the expiration
date), while for put
options the strike price is
the price at which shares
can be sold
SPOT PRICE OPTION PREMIUM
MARKET PRICE PREMIUM
The current price of any
underlying assets specific option contract
that has yet to expire. For
stock options, the
premium is quoted as a
dollar amount per share
and most contracts
represent the
commitment of 100
shares.
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OPTION PRICING
• Intrinsic value
• Time value
• Volatility

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 DEFINITIONS

IN-THE-MONEY AT-THE-MONEY OUT-OF-THE-MONEY

1. For a call option, when A situation where an 1. For a call option,

the strike price is below the option's strike price is when the strike price
market price of identical to the spot is above the
the underlying asset. price of the underlying market price of
security. the underlying asset.
2. For a put option, when
the strike price is above the 2. For a put option,
market price of the when the strike price
underlying asset. is below the
market price of the
underlying asset.
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CALL OPTIONS
o ff
y -
Pa
o fit
Pr
Out-of-the-money
Profit/Loss

Underlying price

In-the-money
At-the-money
(strike price)

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PUT OPTIONS

Pr Pa
ofi y-o
t ff

Out-of-the-money
Profit/Loss

Underlying price

In-the-money
At-the-money
(Strike price)
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 DEFINITIONS

A AMERICAN OPTIONS
Exercisable at any time during maturity
The premium of an
American options is
always higher than that
EUROPEAN OPTIONS of an European option.
E Exercisable only at expiration date (end of maturity)

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 DEFINITIONS

L LONG
The buying of an options contract.

SHORT
S The selling of an options contract

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LONG CALLS
The options trader buy call options with the belief that the price of the underlying security will rise
significantly beyond the strike price before the option expiration date.

Profit
Example: or Loss Profit/loss

Buying a call option

covering 100 shares

Strike price: $40 $0

Option premium: $2 $40 Stock price

-$200
Unlimited potential profit
Limited loss 12
SHORT CALLS
The options trader sell call options and want the option to expire worthless.

Profit
Example:
or Loss Limited profit
Selling a call option Unlimited loss
covering 100 shares
$200
Strike price: $40
Option premium: $2 $0 Stock price
$40

Profit/loss
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LONG PUTS
The investor buy put options with the belief that the price of the underlying security will go
significantly below the striking price before the expiration date.

Example: Profit
or Loss Profit/loss
Buying a put option
covering 100 shares

Strike price: $40

Option premium: $2
$0
$40 Stock price
-$200
“Unlimited” potential profit
Limited loss
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SHORT PUTS
The options trader sell put options and want the option to expire worthless.

Example: Profit
or Loss Limited profit
Buying a call option “Unlimited” loss
covering 100 shares
$200
Strike price: $40
Option premium: $2 $0
$40 Stock price

Profit/loss
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WHY do Investors trade with calls and puts?
LEVERAGE

HEDGE (Investors strategies)

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 LEVERAGE
Budget: $ 1,600 | Stock price: $ 160 | Option: Premium = $ 1.60, Strike = $ 160

OR Buy 10 call options

Buy 10 stocks
(right to buy 1,000 shares)

Stock price: - 1,600 $ Buy stocks for $ 160 - 1,600 $ Option premium
$ 200 + 2,000 $ Sell stocks for $ 200 - 160,000 $ Buy stocks for $ 160
+ 200,000 $ Sell stocks for $ 200
400 $ Profit (RR: 25%) 38,400 $ Profit (RR: 2,400%)

Stock price: - 1,600 $ Buy stocks for $ 160 - 1,600 $ Option premium
$ 120 + 1,200 $ Sell stocks for $ 120
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- 400 $ Loss (RR: -25%) - 1,600 $ Loss (RR: -100%)
QUICK QUIZ
Peter agreed to purchase a call option to buy 100 shares of company X at $80 for $500 of option
premium during the following 6 months. Current share price of company X is $70.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

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ANSWERS
Peter agreed to purchase a call option to buy 100 shares of company X at $80 for $500 of option
premium during the following 6 months. Current share price of company X is $70.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

(1) Premium per share = $500 / 100 = $5

Break-even point = $80 + $5 = $85

(2) The current share price $70 is less than the break-even $85, so he should not exercise.

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QUICK QUIZ
Peter agreed to purchase a put option to buy 100 shares of company X at $80 for $500 of option
premium during the following 6 months. Current share price of company X is $55.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

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ANSWERS
Peter agreed to purchase a put option to buy 100 shares of company X at $80 for $500 of option
premium during the following 6 months. Current share price of company X is $55.
(1) Calculate the break-even point .
(2) Should Peter exercise the option?

(1) Premium per share = $500 / 100 = $5

Break-even point = $80 - $5 = $75

(2) The current share price $55 is lower than the break-even $75, so he should exercise.

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Investment Strategies
Protective put
Buy a stock and simultaneously purchasing a put option on the stock. With this strategy you can avoid
losing all the money invested in the stock.

Pa
yo  Maximum profit = Unlimited
ff
on  Maximum loss = Premium
sto
Pa ck
yo
ff
on Pr
Pu Strike price ofi
t t
Profit/Loss

0$
Underlying price
100$
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Investment Strategies
Covered calls
Buy a stock and simultaneously sell a call option. Maximum profit is the strike price for call, but this
strategy allows the investor to boost income by the premium collected.

Pa
yo
ff
on  Maximum profit = Premium
sto  Maximum loss = Unlimited
ck

Strike price
Pr
ofi
t
0$

120$ Pa Underlying price

yo
100$ ff
on
ca
80$ l l
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Investment Strategies
Straddle
Hold a position in both a call and put with the same strike price and expiration date. Used when you
expect large movements in the stock price, but don’t know I which direction.

Ca
ll on  Maximum profit = Unlimited
l y
Pu

 Maximum loss = 2xPremium

tO
nl

Strike
y

price
Pr
ofi
t
Underlying price
0$

100$

80$ 120$ 24
Quick Quiz
A registered representative has a customer who bought 100 shares of XYZ stock at $30/share.
The stock has appreciated to $40/share in the past eight months. The investor is confident that
the stock is a good long-term investment with additional upside potential but is concerned
about a near-term weakness in the overall market that could wipe out his unrealized gains.
Which of the following strategies would probably be the best recommendation for this
customer?

A. Sell calls on the stock

B. Buy calls on the stock
C. Sell puts on the stock
D. Buy puts on the stock

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Answer
A registered representative has a customer who bought 100 shares of XYZ stock at $30/share. The stock has
appreciated to $40/share in the past eight months. The investor is confident that the stock is a good long-term
investment with additional upside potential but is concerned about a near-term weakness in the overall market that
could wipe out his unrealized gains. Which of the following strategies would probably be the best recommendation for
this customer?

A. Sell calls on the stock

B. Buy calls on the stock
C. Sell puts on the stock
D. Buy puts on the stock

Answer: D.
Explanation: This is a basic strategy question. The customer wishes to fix, or set, his selling
price for the stock. When he buys puts on the stock, the selling (or delivery) price for the stock
is the strike price of the put until expiration. The long stock position is bullish, so to counter a
downward movement, the investor purchases puts. Long puts are bearish.
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Quick Quiz
An investors buys 100 shares of XYZ stock at $30/share and one XYZ 40 put @ 3 to hedge the position. The stock
has appreciated to $40/share in the past eight months. The investor is confident that the stock is a good long-
term investment with additional upside potential but is concerned about a near-term weakness in the overall
market that could wipe out his unrealized gains.

If XYZ stock drops to $27 and the investor exercises the put, what is the profit or loss on the hedged position? 

A) Loss of $3/share
B) Gain of $4/share
C) Loss of $7/share
D) Gain of $7/share

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Answer
An investors buys 100 shares of XYZ stock at $30/share and one XYZ 40 put @ 3 to hedge the position. The stock
has appreciated to $40/share in the past eight months. The investor is confident that the stock is a good long-
term investment with additional upside potential but is concerned about a near-term weakness in the overall
market that could wipe out his unrealized gains.

If XYZ stock drops to $27 and the investor exercises the put, what is the profit or loss on the hedged position? 

A) Loss of $3/share $ Out $ In

B) Gain of $4/share
C) Loss of $7/share Exercising the Put -
D) Gain of $7/share Purchase Price - $30
$40

Put Premium - $3 -
Total Out - $33 -
Total Gain of $7/share 28
Summarize
CALL OPTIONS

1
 Right, but not the obligation, to buy a certain asset at a specific price within a
predetermined time period.
 Investors expect stock price to increase (Short call: to decrease)

PUT OPTIONS

2  Right, but not the obligation, to sell a certain asset at a specific price within a
predetermined time period.
 Investors expect stock price to decrease (Short Put: to increase)

REASONS FOR BUYING OPTIONS

3 1) Hedging
2) Leverage
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THANKS YOU
Q&A

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