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Lecture 2.1: Structure of Options Markets and Basic Applications of Options
Nattawut Jenwittayaroje, PhD, CFA NIDA Business School National Institute of Development Administration
01135534: Financial Modelling
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Important Concepts
Assets underlying exchange-traded options Options terminology Specifications of exchange-traded options Mechanics of trading Open interest and volume Types of traders Basic use of options
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Assets Underlying Exchange-Traded Options
Stock options: A call or put on common stocks such as IBM, Microsoft and etc. They
are traded on CBOE, PHLX, AMEX, and Pacific Stock Exchange. They are American- style.
Index options: A call or put based on a stock market index such as S&P 500, Nasdaq
100, SET 50. The two most popular are options on the S&P100 and S&P500 on the CBOE
Interest Rate Options: Options are traded on T-notes, T-bonds, T-bills, and other debt
instruments.
Foreign currency options The major exchange is PHLX. Offer both European and
American contracts on, e.g., Australian dollar, British pound, Canadian dollar, Euro, Yen, and Swiss franc.
Futures options: in a futures option (or options on futures), the underlying asset is a
futures contract. The most actively traded futures options are the Treasury bond futures
- ption traded on CBOT and the Eurodollar futures option traded on CME.
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Option Terminology
In-the-money: produce “profits” if it were exercised now. At-the-money: give “nothing” if it were exercised now. Out-of-the-money: produce “losses” if it were exercised now. Call option In-the-money: S >X Out-of-the-money: S <X At-the-money: S = X Put option In-the-money: S <X Out-of-the-money: S >X At-the-money: S = X where S = underlying price, X = exercise price