Equity Options Reference Manual

Short Description
important principle in option trading. All other factors being constant (which is rarely ….. A variety of available strategies are attached to this guide. …

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Content
Reference Manual > Equity Options
A
AGE
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AL
ANP
ATY
BLD
CM
ZMC
WCO
BMO
ZBM
WBM
BNS
ZBQ
WBQ
NA
ZNA
WNA
RY
ZRY
WYR
TD
ZTD
WTD
ABX
ZBA
WBA
IFM
BCE
ZBC
WBC
BVF
BBD
ZBB
WBB
BNN
CAE
CNQ
TEU
CP
CLS
ZLS
WSL
GIB
CIX
CSN
CNR
CLY
DFS
ENB
FHR
SLF
GWO
IMG
IMO
N
JDU
KL
MG
MDS
MNG
MOL
NXY
NRD
ZRD
WRD
NT
ZNT
WNT
NCX
PCA
PKN
PDG
ZDP
WDP
POW
PD
QLT
RIM
RCI
SJR
MFC
SU
TLM
TEK
T
TOC
TA
TRP
XEG
XFN
XFN
XGD
XIT
A
AGE
AC> Table of Contents
> Introduction …………………………………………………………………………………………………………………2
> What is an equity option contract? …………………………………………………………………………………3
> Elements in an option contract…………………………………………………………………………………3
1. Option types……………………………………………………………………………………………………………..3
2. Underlying asset ………………………………………………………………………………………………………..3
3. Expiry month…………………………………………………………………………………………………………….3
4. Strike price………………………………………………………………………………………………………………..4
5. Premium……………………………………………………………………………………………………………………5
a) Intrinsic value of options ……………………………………………………………………………………5
b) Time value of options …………………………………………………………………………………………6
> Exercise styles………………………………………………………………………………………………………………6
> Call options………………………………………………………………………………………………………………….6
> Why do investors buy or sell call options?…………………………………………………………………………7
> Put options…………………………………………………………………………………………………………………..9
> Why do investors buy or sell put options? ………………………………………………………………………9
> Components that influence option premiums………………………………………………………………..10
1. Underlying stock price ………………………………………………………………………………………………10
2. Strike price………………………………………………………………………………………………………………11
3. Time to expiry ………………………………………………………………………………………………………….11
4. Stock price volatility …………………………………………………………………………………………………12
5. Risk-free interest rates………………………………………………………………………………………………12
6. Anticipated dividends during the life of the option…………………………………………………….12
> Implied volatility of options …………………………………………………………………………………..13
> Advanced concepts………………………………………………………………………………………………………13
1. Option pricing ………………………………………………………………………………………………………….13
a) The Black-Scholes model …………………………………………………………………………………..13
b) The binomial model ………………………………………………………………………………………….15
2. The “Greeks” ……………………………………………………………………………………………………………17
a) Delta………………………………………………………………………………………………………………….17
b) Gamma……………………………………………………………………………………………………………..18
c) Vega…………………………………………………………………………………………………………………..18
d) Theta…………………………………………………………………………………………………………………19
e) Rho ………………………………………………………………………………………………………………………