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Options, 3rd Edition


The third edition of Options is a comprehensive look at the most simple to the more complex use and structure of options. Presented in a non-mathematical format, the reader will be able to understand how options are priced, how they are traded and what their payoffs might be.

Although there is a significant discussion of American options, there is also extensive coverage of foreign currency options including European options as well. A new chapter covering exotic options has been added to allow the reader to explore some of the more contemporary and complex class of options.

The book is accompanied by an IBM-PC compatible program called OPTION! This program consists of nine modules and can compute all of the model prices and examples in the book. The more than 50 exercises can also be computed using the OPTION! software.



Part I: The Options Market:.

1. Introduction.

2. What Is an Option?.

3. An Option Example.

4. Moneyness.

5. American and European Options.

6. Why Trade Options?.

7. The Option Contract.

8. The Options Market.

9. Option Trading Procedures.

10. The Clearinghouse.

11. Margins.

12. Commissions.

13. Taxation.

14. The Organization of the Text.

15. OPTION!Software.

16. Summary.

17. Questions and Problems.

18. Notes.

Part II: Option Payoffs and Option Strategies:.

1. Introduction.

2. Stocks and Bonds.

3. Arbitrage.

4. Option Notation.

5. European and American Option Values at Expiration.

6. Buy or Sell a Call Option.

7. Call Options at Expiration and Arbitrage.

8. Buy or Sell a Put Option.

9. Moneyness.

10. Option Combinations.

11. Combining Options with Bonds and Stocks.

12. Summary.

13. Questions and Problems.

14. Notes.

Part III: Bounds on Option Prices:.

1. Introduction.

2. The Boundary Space for Call and Put Options.

3. Relationships Between Call Prices.

4. Relationships Between Put Option Prices.

5. Option Prices and the Interest Rate.

6. Option Prices and Stock Price Movements.

7. Option Prices and the Riskiness of Stocks.

8. Summary.

9. Questions and Problems.

10. Notes.

Part IV: European Option Pricing:.

1. Introduction.

2. The Single-Period Binomial Model.

3. The Multi-Period Binomial Model.

4. Binomial Put Option Pricing.

5. Stock Price Movement.

6. The Binomial Approach to the Black-Scholes Model.

7. The Black-Scholes Option Pricing Model.

8. Inputs for the Black-Scholes Model.

9. European Options and Dividends.

10. Tests of the Option Pricing Model.

11. Summary.

12. Questions and Problems.

13. Notes.

Part V: Option Sensitivities and Option Hedging:.

1. Introduction.

2. Option Sensitivities in the Merton and Black-Scholes Models.


4. DELTA-Neutral Positions.


6. VEGA.

7. RHO.


9. Creating Neutral Portfolios.

10. Option Sensitivities and Option Trading Strategies.

11. Summary.

12. Questions and Problems.

13. Notes.

Part VI: American Option Pricing:.

1. Introduction.

2. American versus European Options.

3. Pseudo-American Call Option Pricing.

4. Exact American Call Option Pricing.

5. Analytical Approximations of American Option Prices.

6. The Binomial Model and American Option Prices.

7. Summary.

8. Questions and Problems.

9. Notes.

Part VII: Options on Stock Indexes, Foreign Currency, and Futures:.

1. Introduction.

2. European Option Pricing.

3. Option Sensitivities.

4. Pricing American Options.

5. Summary.

6. Questions and Problems.

7. Notes.

Part VIII: The Options Approach to Corporate Securities:.

1. Introduction.

2. Equity and a Pure Discount Bond.

3. Senior and Subordinated Debt.

4. Callable Bonds.

5. Convertible Bonds.

6. Warrants.

7. Summary.

8. Questions and Problems.

9. Notes.

Part IX: Exotic Options:.

1. Introduction.

2. Assumptions of the Analysis and the Pricing Environment.

3. Forward-Start Options.

4. Compound Options.

5. Chooser Options.

6. Barrier Options.

7. Binary Options.

8. Lookback Options.

9. Average Price Options.

10. Exchange Options.

11. Rainbow Options.

12. Summary.

13. Questions and Problems.

14. Notes.

15. OPTION!Installation and Quick Start.

16. Exercises for OPTION!.