Part 5:  Options and Option Valuation

Chapter 20
Introduction to options

What is an option?
Why buy a call?
Why buy a put option?
General properties of option prices
Writing options, shorting stock
Option strategies
Spreads and butterflies

Excel functions:  Max, Min

PPT for Chapter 20

Chapter 21
Option pricing facts

Fact 1:  Call price C0 > Max[S0 – PV(X),0]
Fact 2:  Don’t early-exercise calls!
Fact 3:  Put-call parity:  P0 = C0 + PV(X) - S0
Fact 4:  American put price bound P0 > Max[X – S0, 0]
Fact 5:  Bounds on European put price:  P0 > Max[PV(X) – S0, 0]
Fact 6:  Early-exercise of puts might be optimal
Fact 7:  Option prices are convex

Excel functions:  Max, Sum, If

PPT for Chapter 21

Chapter 22
The Black-Scholes formula

Black-Scholes model
 option volatility from stock prices
Implied volatility
An Excel Black-Scholes function
Sensitivity analysis on Black-Scholes formula
Does Black-Scholes work?  Applying it to the data
Real options

Excel functions:  Exp, Date, Ln, Stdevp, Varp, Data Table

PPT for Chapter 22

Chapter 23
Binomial option pricing

Binomial option pricing model
What can you learn from the binomial model?
Multiperiod binomial model
Using binomial model to price an American put

Excel functions:  Max

PPT for Chapter 23