Good Afternoon 915

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Good Afternoon 9/15

• HW 1 Posted due Thursday, 9/22. We will also
  have a big quiz (on 9/22) a double quiz so
  after next Thursday, we will have three quiz / HW
  grades!
• Today do exercise from last week on the goog
  310 put, finish options writing options, a zero
  sum game, and a profit loss function to see what
  is going on!
• Introduce the futures market.
• New posting very important if you did not get
  hold of a guide to money and investing (warning,
  its a big pdf file)
• Also, another posting, reading the stock pages
  and what is a PE ratio? An example.

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Reading assignment -

• Please read chapters 7 and 13

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But first, a couple pictures

• Look for a bubble bursting????

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• The Dow since 1995

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The components of the DOW Jones industrials

• Click Here for the components and Here for dogs
  of Dow

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The Nasdaq
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Do example with put from last week
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Now draw a profit loss function for a
randomly selected option (from BBY) be sure to
stress that we are only evaluating the profit /
loss at expiration
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Writing calls puts

• When you write and option, you are giving someone
  the right to exercise the option that you write.
• For example, suppose you own 100 shares of IBM
  stock and you are bearish.
• You could write one call (say a 110 call) and
  sell it to someone say for 50
• If IBM never gets to 110, you simply keep the
  money (the premium).
• If IBM does get in the money, say to 115, then
  you must honor the call you sold and sell 100
  shares at ______
• You are not happy discuss difference between
  covered and naked calls (naked is more risky).

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Zero Sum game

• Show on overhead

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Example of writing a put (bullish)

• IBM spot is 100 as before write one 90 put and
  sell for 50. If IBM never gets below 90, you
  simply keep the 50 premium.
• Suppose IBM goes to 85 and option is exercised.
  You must buy 100 shares at ___
• Difference between naked and covered put
• A covered put is when you have established a
  short position on IBM

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Zero sum game

• Show on overhead

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Now discuss options as a form of compensation

• Whats the idea?
• Whats the (possible) problem?

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Back to stock price determination

• Write down example on overhead
• State assumption
• Expectations of three successive years of
  profits 5000, 12,000, 14,000
• Expectations of 1 year interest rates 3.5, 5,
  5
• Calculate PV of firm
• Assume 1000 shares outstanding what is the
  price of stock?
• What is the PE ratio?
• See worksheet

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Introduce futures

• The wheat farmer and the bread maker go to
  problem on web