Share options and option pricing (part 1) – ACCA (AFM) lectures
Reader Interactions
Comments
Leave a Reply
You must be logged in to post a comment.
Free ACCA & CIMA online courses from OpenTuition
Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams
20% off ACCA & CIMA Books
OpenTuition recommends the new interactive BPP books for March and June 2025 exams.
Get your discount code >>
Great lecture sir Moffat
Thank you 馃檪
May be speculator’s. They may expect your share will going up .
The person who sold you the option!!
Dear Moffat
If we buy a share put option for example with exercise price of 5 dollar in 3 months time. if the price of share falls to 2 dollar in 3 months. who will buy a sahre from me for 5 dollars while it is 2 dollars in market? thaks for your answer
We purchase a put option to protect ourselves incurring losses in the future (we think that our share’s value will fall down in the future)
Eg=$10 Share and we think its going to fall down to 6$
We (A) sell, the person buying from us (B) thinks that the price of the share will potential increase in the future
So we get into a put option at 8$ with (B) and we have to pay a premium eg 0.5$ to B for getting into the contract.
Once (B) has entered into the contract, he has to buy regardless. Only we have to right( we can either sell it to B or ignore)
Now, lets say price has indeed fallen to 6$, you get to sell them at 8$ (making a profit of 8$-6$=2$ – premium paid 0.5$ = 1.5$ in overall profit)
and B has made loss
On the other hand, if the price has increased to 12$, you simply don’t sell it to (B) since you have the right to ignore. As you can directly sell in the market at 12$ (making a profit of 12$-10$=2$ – premium paid 0.5$ = 1.5$)
correction*
12$-8$=4$-premium paid 0.5$= 3.5$ Profit
sorry, my previous one is correct.
1.5$ profit.
Please let me know if I need to be corrected 馃檪
Correct, If the Price Rises to $12:
The buyer (A) will not exercise the put option because they can sell the shares in the open market for $12.
The buyer (A) loses only the premium paid, which is $0.5 per share.