Series 7

AAA

Derivatives - Graphical Interpretations for Calls

At this point, you may find it helpful to see illustrations of how an option can be in- or out-of-the money. These line graphs will not be on the test, so if you find them more confusing than helpful, you can skip over them. They are included in this guide to help you understand the concept of options and see how to compute their "moneyness".

Let's look at a typical long call. Let's say it is 1 MNO May 100 call @ 3; essentially the spot rate for the stock has to rise above $103 ($100 strike price plus $3 premium) to be in-the-money. In fact, the option begins life at $3 out-of-the-money because of the premium.

This graph reflects the point of view of the buyer. The view of the writer - who goes short when she sells a call - is a mirror image:

Figure 8.1: Long Call




Figure 8.2: Short Call


Graphical Interpretations for Puts
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