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Sources: Panel A: Flow of Funds Accounts, Flows and Outstandings, Board of Governors of the Federal Reserve System, June 2001 and The Bond Market Association. Panel B: Frank K. Reilly, G. Wenchi Kao, and David J. Wright, "Alternative Bond Market Indexes," Financial Analysts Journal (May-June 1992), pp. 44-58.

Sources: Panel A: Flow of Funds Accounts, Flows and Outstandings, Board of Governors of the Federal Reserve System, June 2001 and The Bond Market Association. Panel B: Frank K. Reilly, G. Wenchi Kao, and David J. Wright, "Alternative Bond Market Indexes," Financial Analysts Journal (May-June 1992), pp. 44-58.

When the market price exceeds the exercise price, the option holder may "call away" the asset for the exercise price and reap a benefit equal to the difference between the stock price and the exercise price. Otherwise, the option will be left unexercised. If not exercised before the expiration date, the option expires and no longer has value. Calls, therefore, provide greater profits when stock prices increase and so represent bullish investment vehicles.

A put option gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. An October put on IBM with exercise price $100 entitles its owner to sell IBM stock to the put writer at a price of $100 at any time before expiration in October even if the market price of IBM is lower than $100. While profits on call options increase when the asset increases in value, profits on put options increase when the asset value falls. The put is exercised only if its holder can deliver an asset worth less than the exercise price in return for the exercise price.

Figure 2.11 presents stock option quotations from The Wall Street Journal. The highlighted options are for IBM. The repeated number below the name of the firm is the current price of IBM shares, $101.26. The two columns to the right of the firm name give the exercise price and expiration month of each option. Thus, we see listings for call and put options on IBM with exercise prices ranging from $90 to $110, and with expiration dates in October, November, and January.

put option

The right to sell an asset at a specified exercise price on or before a specified expiration date.

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