1) \$1
2)a.ITM
b.ITM
3)2.55
4)Put value decreases, call value increases
5)1 yr because of theta decay

Mr.Saxman:

Read Natenberg before you make that decision - don't base it off an abbreviated and oversimplified series like this

gammaovertheta:
Mr.Saxman:

Read Natenberg before you make that decision - don't base it off an abbreviated and oversimplified series like this

Absolutely read Sheldon Natenberg's book! Brilliant work!
http://www.amazon.com/Option-Volatility-Pricing-St...

In fact having an understanding of the basics of options will certainly help when you read his book

~~ Fortune favours the brave ~~

My WSO Blog

Mr.Saxman:

Did you do the homework qtns?

~~ Fortune favours the brave ~~

My WSO Blog

- deleted

rockstarlive:

you are correct

~~ Fortune favours the brave ~~

My WSO Blog

LaFemmeFinanciere:
rockstarlive:

you are correct

Awesome! Can we cover option strategies or Black-Scholes next?

rockstarlive:
LaFemmeFinanciere:
rockstarlive:

you are correct

Awesome! Can we cover option strategies or Black-Scholes next?

Sure, after we do the Greeks though.

~~ Fortune favours the brave ~~

My WSO Blog

Can you explain the last part of the parity? I understand everything else no problem, but I don't understand the part where the parity has to be worth \$5 to us. Can you go a little more in depth here?

dest149:
Can you explain the last part of the parity? I understand everything else no problem, but I don't understand the part where the parity has to be worth \$5 to us. Can you go a little more in depth here?

Sure, Let's take a look at the current stock price as seen above in the Put-Call Parity explanation. Since Parity= Stock - Strike and the stock price is \$20, Strike Price(K) is \$15, Parity is \$5. Are you confused about the ITM/OTM parts?

~~ Fortune favours the brave ~~

My WSO Blog

LaFemmeFinanciere:
dest149:
Can you explain the last part of the parity? I understand everything else no problem, but I don't understand the part where the parity has to be worth \$5 to us. Can you go a little more in depth here?

Sure, Let's take a look at the current stock price as seen above in the Put-Call Parity explanation. Since Parity= Stock - Strike and the stock price is \$20, Strike Price(K) is \$15, Parity is \$5. Are you confused about the ITM/OTM parts?

Right I understand the math of it. I guess I what I was trying to ask is what a parity actually is. Not how it is calculated. For example, the parity is \$5, but what does that \$5 signify? Is that profit per option so you get \$500 (since 100 shares/contract) is it a sort of premium that you would implement if you think the shares are going no where? Yes I understand ITM and OTM, although I am not sure what the point of buying ITM is....

dest149:
LaFemmeFinanciere:
dest149:
Can you explain the last part of the parity? I understand everything else no problem, but I don't understand the part where the parity has to be worth \$5 to us. Can you go a little more in depth here?

Sure, Let's take a look at the current stock price as seen above in the Put-Call Parity explanation. Since Parity= Stock - Strike and the stock price is \$20, Strike Price(K) is \$15, Parity is \$5. Are you confused about the ITM/OTM parts?

Right I understand the math of it. I guess I what I was trying to ask is what a parity actually is. Not how it is calculated. For example, the parity is \$5, but what does that \$5 signify? Is that profit per option so you get \$500 (since 100 shares/contract) is it a sort of premium that you would implement if you think the shares are going no where? Yes I understand ITM and OTM, although I am not sure what the point of buying ITM is....

The whole point is that in a delta neutral portfolio, puts and calls are the same thing. As a corollary, the implied vol for the same strike therefore must be the same irrespective of whether it is a put or a call. With some deviation for american options or assets with dividends, of course.

Jack: They're all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

dest149:
LaFemmeFinanciere:
dest149:
Can you explain the last part of the parity? I understand everything else no problem, but I don't understand the part where the parity has to be worth \$5 to us. Can you go a little more in depth here?

Sure, Let's take a look at the current stock price as seen above in the Put-Call Parity explanation. Since Parity= Stock - Strike and the stock price is \$20, Strike Price(K) is \$15, Parity is \$5. Are you confused about the ITM/OTM parts?

Right I understand the math of it. I guess I what I was trying to ask is what a parity actually is. Not how it is calculated. For example, the parity is \$5, but what does that \$5 signify? Is that profit per option so you get \$500 (since 100 shares/contract) is it a sort of premium that you would implement if you think the shares are going no where? Yes I understand ITM and OTM, although I am not sure what the point of buying ITM is....

You don't buy ITM, you want it to be in the money at or before expiration. So for a long call you want (St>K) - P in order for it to be ITM
Yes \$500 profit is correct.

Parity is the amount by which an option is in the money. (aka moneyness of the option) Parity refers to the option trading in unison with the stock. This also means that parity and intrinsic value are closely related. When we say that an option is trading at parity, we mean that the option's premium consists of only its intrinsic value. (we will cover Intrinsic value next post)

For example, if Microsoft was trading at \$53.00 and the January K=50 calls were trading at \$3.00, then the January 50 calls are said to be trading at parity. Under the same guidelines, the January K=45 call would be trading at parity if they were trading at \$8.00. So, parity for the January 50 calls is \$3.00 while parity for the January 45 calls is \$8.00

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LaFemmeFinanciere:

You don't buy ITM, you want it to be in the money at or before expiration. So for a long call you want (St>K) - P in order for it to be ITM
Yes \$500 profit is correct.

But some people do buy ITM and my question is why.... I recognize that you want the option to fall ITM at or before the time of expiration. Thanks for the post on parity. Just to be clear, parity is just the amount the option is in the money, but it does not take into account the premium.

LaFemmeFinanciere:
You don't buy ITM, you want it to be in the money at or before expiration.

There are so many things wrong with these generalizations. Many people buy ITM options for a number of reasons across a variety of strategies - maybe they want to go long synthetically at a certain strike, so they buy an ITM call and write a put against it, or maybe they want to leg into a spread that requires an ITM put, or maybe they have a view on volatility at that strike (volatility trading is the most common options strategy at financial institutions after all). It doesn't matter why, but it happens all the time.

Similarly there's no reason to say that "[being] in the money at or before expiration" is the only way to make money in options. If you buy a way OTM option with a delta value of 2 and sell it a few weeks later when it's trading with a 45-delta, then you have most likely made triple digit returns! Who gives a shit if it's ITM or ATM as long has it increased in price? Making money in options is the same as making money in any investment - you enter a position and you want it to increase in value. Assuming you aren't holding these to the moment of expiration, passing the 50-delta threshold has no cash significance.

... not another presentation deck to summer interns please...

Am an options market maker - if you are a retail investor or a sole investore, DONT trade options, you haven't got the pockets to make the strategies work.

Furthermore, aside from german equities and a few index options, bid offer spreads are too wide

1percentblog.com

redrut:
Am an options market maker - if you are a retail investor or a sole investore, DONT trade options, you haven't got the pockets to make the strategies work.

Furthermore, aside from german equities and a few index options, bid offer spreads are too wide

What advice do you have for the students who want to be brokers/market makers or trade for example fx/equity options at a large Inv. bank's trading desk?

~~ Fortune favours the brave ~~

My WSO Blog

redrut:
Am an options market maker - if you are a retail investor or a sole investore, DONT trade options, you haven't got the pockets to make the strategies work.

Furthermore, aside from german equities and a few index options, bid offer spreads are too wide

Disagree, options can be very useful when executing levered directional bets in certain equities. Selling covered calls is also a tried and true retail strategy for the buy and hold investor. However, market making in vol requires deep pockets yes.

Advice for getting into options on a inv bank market making or broking desk...I work for a smaller market maker and we play in listed derivatives only.

Derivatives volumes are heavily down, there isn't as much money in the system as there used to be, the overload of brokers and mkt makers have tightened prices quite signficiantly. It's a very cyclical business where the gov bond desk is having a great year but the Equities is doing F all.

My advice, steer clear of single stocks derivs desks, closing down at a fast rate. Short end used to be great but with interest rates bounded to 0 for the considerable future, there may be less reason for trades to be put on, so less edge for a market maker.

For a market maker, practice your short and medium memory skills. Not joking at all! We quote every 40 seconds for strategies (I am on the govt bond desk) over 10 products each with for active months. We have to know whats trading, how much of it, whats the current market position - you can use software aids to help but you need to be quick with pricing so you need a good recall of numbers.

Brokers - I can't comment, interdealer brokers seem to be earning a lot more than you would think considering they take no risk but if you want to use your brain, this is probably not the job for you.

Finally be aware that more complicated derivatives may see vastly reduced markets in the future while you should keep an eye on the swaps/swaptions market as it slow comes on exchange.

Sorry I have nothing specific

1percentblog.com

This is a great post and so is your subsequent post on options. Really appreciate it, even if only for personal interest.

It would be great (and forgive me if this already exists and I just haven't found it) if WSO could have an educational, or basic finance forum for great stuff like this.

Remember, once you're inside you're on your own.
Oh, you mean I can't count on you?
No.
Good!

There's a problem with the analogy - you purchased the underlying asset (the artwork). Had you simplistically agreed via a contract to purchase the artwork at a specific price at a future date, now that's an option!