Options

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Options

• An option is a financial contract in which one
  party (the buyer) MAY buy (for a Call option) or
  sell (for a Put option) a specified quantity of
  an asset at or before a specified date, for a
  fixed exercise or strike price. The buyer pays
  an option price, or premium, upfront in exchange
  for the right to exercise this option.
• The counterparty (the seller, or writer of the
  option) MUST sell (for a call option) or buy (for
  a put option) the specified asset at the exercise
  price if and when the buyer exercises his right.
  In exchange, the writer receives the premium from
  the buyer upfront.

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A Call Caps the Cost of Refinery Feedstock
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A Put Supports a Producers Sales Revenue
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Hedgers Buy Options, Never Sell Options
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Calls or Forwards?

• The call offers protection and profit
• the airline get protection from high fuel price
• but reaps the benefit of low fuel price
• The futures contract offers only protection
• no downside risk
• no upside profit
• The call sells for a premium price!

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Costless Collar Provides Both Floor Ceiling
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Constructing the Costless Collar
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Current Market Pricing of Collars
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Option Value and Delta
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Delta is Most Sensitive to Spot Price In Vicinity
of Strike Price
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Theta is the slope, decline in value as time
expires
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Estimating the GreeksFrom the Binomial Tree
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