Figure 211

Listing of stock option quotations

Source: From The Wall Street Journal, October 19, 2001. Reprinted by permission of Dow Jones & Company, Inc. via Copyright Clearance Center, Inc. © 2001 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

The next four columns provide the trading volume and closing prices of each option. For ex-ample,16,292 contracts traded on the October expiration call with an exercise price of $100. The last trade was at $1.80, meaning that an option to purchase one share of IBM at an exercise price of $100 sold for $1.80. Each option contract (on 100 shares of stock), therefore, costs $1.80 X 100 = $180.

Notice that the prices of call options decrease as the exercise price increases. For example, the October 2001 maturity call with exercise price $105 costs only $.20. This makes sense, as the right to purchase a share at a higher exercise price is less valuable. Conversely, put prices increase with the exercise price. The right to sell a share of IBM in October at a price of $100 costs $0.80 while the right to sell at $105 costs $4.

Option prices also increase with time until expiration. Clearly, one would rather have the right to buy IBM for $100 at any time until November than at any time until October. Not surprisingly, this shows up in a higher price for the November expiration options. For example, the call with exercise price $100 expiring in November sells for $5.20, compared to only $1.80 for the October call.

6. What would be the profit or loss per share of stock to an investor who bought the October maturity IBM call option with exercise price $100, if the stock price at the expiration of the option is $104? What about a purchaser of the put option with the same exercise price and maturity?


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Lessons From The Intelligent Investor

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