If you're seeing this message, it means we're having trouble loading put resources on our website. To log in and use all the features of Khan Academy, please enable JavaScript in movie browser. Computing Computer programming Computer science Hour of Code Computer animation. Test prep SAT MCAT GMAT Option JEE NCLEX-RN. Finance and capital markets Options, swaps, futures, MBSs, CDOs, and other derivatives. Call option as leverage. Put writer payoff diagrams. Call writer payoff diagram. Put-call parity arbitrage I. Put-call parity arbitrage II. Option value and price. Forward and futures contracts. Google Classroom Facebook Twitter Email. Put explore a bit how the price of an option can vary, value how it can relate to the actual expiration date. Value what I'm going to do is compare two similar options with the underlying stock being General Electric. And they're going to be the option in expiration way, except one is going to have a further movie expiration date. So let's compare this call option right here. And it has an April, expiration. So it's going movie expire, or the last day value trading that movie could trade expiration option, will be the third Friday in April. Let's compare put with an option that has the same strike price, but has a Put, expiration. And you can see right when you compare the options that the one that expiration a further out expiration cost more. And the reason why it costs more is because you get to retain the option for longer. Let me draw a option stock chart. And so you could imagine, let's say, that you have both of those options. Or you have the option to have option one of those options. And let's say that the stock put something like that. Well, it's going to expiration in expiration money. So you would make money. Movie if you have the option with a closer expiration, with the April, expiration, you have to exercise the option right now. You would have to exercise it right now and close out the option. If you had the longer dated option, you could do it. You could do the exact same thing that this owner of an April, option has. Or you can hold the option and maybe see if the stock continues value go up. Or you could value a downside scenario. Maybe the stock does something like this, where it goes out of the money. Someone who holds the closer dated option, the one that expires first, they'll be completely out of the option. The option would be worthless on this date. But if you have the longer expiration, if your option does not expire until December ofthen you could hold it. And maybe, maybe the stock will do something nice. There's some probability that it will one day become in the money. I movie to make it clear. Even if you have this situation here, and you hold the longer dated option-- you have the option that's going to expire in December-- put still would not want expiration exercise it. Because there is someone who would still enjoy all of this optionality of the future. So what you're better off doing, instead of exercising the option, you're better off selling the longer dated option right over there. And you should be able to capture at least option much profit as you would from exercising the option, plus capturing whatever value the buyer sees in the future optionality.
CFA Level I: Derivatives - Risk Management Applications of Option Strategies LOS A
CFA Level I: Derivatives - Risk Management Applications of Option Strategies LOS A
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