Investments - Lect. 12-14 Flashcards
An option is said to be in the money when:
Exercise today would generate a cash flow (the option currently has value)
An option is at the money when
The exercise price
and asset price are equal
An option is out of the money when
The asset price and exercise price are different such that the option is worthless
A Call Option is out of the money when:
Exercise price is above asset price
A Put Option is out of the money when:
Exercise price is below asset price
A Put Option is out of the money when:
Exercise price is below asset price
Relationships about Call Option prices?
(1) Price is lower when exercise price is higher. (2) Price increases as volatility in the underlying asset increases. (3) Price increases as time to expiration increases.
Relationships about Call Option prices?
(1) Price is lower when exercise price is higher. (2) Price increases as volatility in the underlying asset increases. (3) Price increases as time to expiration increases.
Buy share of stock and put option on stock. Limits ____ while allowing unlimited potential ____. Payoff function similar to ______.
Protective Put: Losses, Gains, Call Option
Buy share of stock and a simultaneous short position in a call option. If exercised, ____ ____ can simply sell the share of the stock they currently own. Commonly used by ____ ____. Gain ____ ____ in most situations. Forces sale of the stock if it has ______ in value by the expiration date.
Covered Call Position: The short position, Institutional Investors, small premiums, dropped
Buy a call and put option on the same stock with the same exercise price and maturity. Used when predict stock to be more _____ than the market. Selling this makes it less ____ than the market.
Straddle, Volatile, Volatile
Going into a long and short position in 2 call OR 2 put options @ either different strike prices or times to maturity. Long position on a call with ____ Strike Price and short position on a call with ____ Strike Price will pay out if stock price goes ___, but has limited _____ potential
Spread, Lower, Higher, Up, Gain
Puts bounds on the gain and loss potential on a share of stock. Purchase Protective Put at strike price ____ current stock price. Write call option at a strike price ____ current Strike Price. Premiums should be roughly ____.
Collar, Below, Above, Equal
Give the issuing firm the option to buy back at the call price and reissue it at a lower interest rate. Higher ____ relative to identical straight ___. Limited ___ ___ potential. Cannot be exercised until after some period of ___ ___ and price may change over time.
Callable Bonds, Coupons, Capital Gains, Call Protection
Give the issuing firm the option to buy back at the call price and reissue it at a lower interest rate.
Callable Bonds
Puts bounds on the gain and loss potential on a share of stock.
Collar
Going into a long and short position in 2 call OR 2 put options @ either different strike prices or times to maturity.
Spread
Buy a call and put option on the same stock with the same exercise price and maturity.
Straddle
Buy share of stock and a simultaneous short position in a call option.
Covered Call Position
Buy share of stock and put option on stock.
Protective Put
Buy share of stock and put option on stock.
Protective Put
Forecasting earnings per share is _____ b/c it involves:
Very Difficult - involves lots of international, firm-specific and macroeconomic factors
Forecasting P/E ratio is:
Even more difficult than forecasting earnings per share
Forecasting P/E ratio is:
Even more difficult than forecasting earnings per share
As PVGO gets larger, P/E ratio will _____
Increase
As PVGO gets larger, P/E ratio will _____
Increase
P/E ratio increases as ___ Increases
ROE
P/E ratio increases as b increases as long as ____>____
ROE > k
PEG Ratio = (Formula) - Tends to be between __ and __, if less than __ it may be undervalued relative to its growth prospects.
P/E Ratio / Growth Rate -
1 and 1.5, 1
PEG Ratio = (Formula) - Tends to be between __ and __, if less than __ it may be undervalued relative to its growth prospects.
P/E Ratio / Growth Rate -
1 and 1.5, 1
All else equal, as k increases (firm becomes riskier), the P/E Ratio will
Drop
Small firms tend to still have very high ___ ___
P/E Ratios
Problems with P/E Ratios
1) Earnings use accounting values, which are subject to manipulation and fluctuations due to inflation. (2) Earnings can also be affected by the business cycle. (3) Our formulas have been for P0/E1 , or next year’s earnings,
when we only actually have last year’s earnings. (4) High P/E ratios may be unsustainable in the long term; need to look at long-term trends.
Problems with P/E Ratios
1) Earnings use accounting values, which are subject to manipulation and fluctuations due to inflation. (2) Earnings can also be affected by the business cycle. (3) Our formulas have been for P0/E1 , or next year’s earnings,
when we only actually have last year’s earnings. (4) High P/E ratios may be unsustainable in the long term; need to look at long-term trends.
Comparative Valuation Ratios: ratio of price per share divided by book value per share
Price-to-Book Ratio
Comparative Valuation Ratios: ratio of price to cash flow per share
Price-to-Cash Flow Ratio
Comparative Valuation Ratios: the ratio of stock price to the annual sales per share
Price-to-Sales Ratio
