Principles of Corporate Finance_ 12th Edition

Chapter 20 Understanding Options 527

bre44380_ch20_525-546.indd 527 09/30/15 12:07 PM

Now look at the quotes for options maturing in June 2015 and January 2016. Notice how
the option price increases as option maturity is extended. For example, at an exercise price
of $530, the March 2015 call option costs $28.00, the June 2015 option costs $36.00, and the
January 2016 option costs $54.60.
In Chapter 13 we met Louis Bachelier, who in 1900 first suggested that security prices
follow a random walk. Bachelier also devised a very convenient shorthand to illustrate the
effects of investing in different options. We use this shorthand to compare a call option and a
put option on Google stock.
The position diagram in Figure  20.1(a) shows the possible consequences of investing in
Google June 2015 call options with an exercise price of $530 (boldfaced in Table 20.1). The
outcome from investing in Google calls depends on what happens to the stock price. If the

Maturity Date Exercise Price Price of Call Option Price of Put Option

March 2015 $470 $72.70 $7.50

500 45.70 13.60

530 28.00 24.64

560 13.10 43.60

590 7.50 67.10

June 2015 $470 $80.50 $13.20

500 56.00 20.65

530 36.00 34.55

560 20.00 53.70

590 12.30 72.50

January 2016a $470 $99.10 $28.70

500 72.00 40.70

530 54.60 52.40

560 38.00 67.55

590 28.30 84.30

❱ TABLE 20.1

Selected prices of put and

call options on Google

stock in December 2014,

when the closing stock

price was about $530.

a Long-term options are called

“LEAPS.”

Source: Yahoo! Finance, finance.

yahoo.com

◗ FIGURE 20.1 Position diagrams show how payoffs to owners of Google calls and puts

(shown by the colored lines) depend on the share price. (a) Result of buying Google call exercisable

at $530. (b) Result of buying Google put exercisable at $530.

$530

(a )

$530

(b )

$530 $530

Value of

call

Value of

put

Share

price

Share

00 price