Stock Options

An Option is a contract between two parties in which one party has the

right but not the obligation to do something-usually to buy or sell some underlying asset.
Calls and Puts Key terms

1.
2. 3.

Option holder
Option writer or option granter Time of expiration or time of expiry

4.
5.

Expiration date
Strike price or exercise price

Stock Options
American option and European Option IBM November 100 call

Option Premiums ------call-------IBM

97.5

------put--------

Strike Dec
90
105 .75

jan Apr Dec Jan Apr

9.125 11.125 .25
2.125 5.125 2.675

8.375

.625
3.075

1.875
5.25

Stock Options
Monieness

In the money At the money Out of the money Monieness and Options

Relationship
A>S A=S A<S

Calls
in the money At The money

Puts
out of the money At the money

Out of the money In The money

A= Actual Price
S= Strike Price

Equity Warrants
Similar to call options as they grant the holder the right

without the obligation to buy the underlying stock from the

warrant granter.
Differ from stockholders in the following ways:
1. 2. 3.

Warrants are issued by corporations whose stock represents the underlying assets. They do not necessarily cover 100 shares of stocks. They have very long life.(3 to 10 years)

4.
5.

Not necessarily exercisable during their entire life.

Often issued in conjunction with debt or preferred stock.

Equity Warrants
Benefits of Equity Warrants:
1.

The issuer can reduce the coupon rate necessary to sell debt or
preferred stock. The investor gets an equity kicker. Can be used as an effort to motivate employees to work in the best interest of the firms shareholders. Investor finds warrants attractive because like stock options, they offer considerable leverage. Warrants have added feature of having much longer life than stock options.

2. 3.

4.

5.