Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionV. Risk and Return 14. Options and Corporate
Finance© The McGraw−Hill^483
Companies, 2002best-known corporations in the United States are traded there. The CBOE is still the
largest organized options market, but options are traded in a number of other places to-
day, including the New York, American, and Philadelphia stock exchanges. Almost all
such options are American (as opposed to European).
A simplified Wall Street Journalquotation for a CBOE option might look something
like this:
The first thing to notice here is the company identifier, RWJ. This tells us that these op-
tions involve the right to buy or sell shares of stock in the RWJ Corporation. Just below
the company identifier is the closing price on the stock. As of the close of business on
the day before this quotation, RWJ was selling for $100 per share.
The second column shows the strike price. The RWJ options listed here have an ex-
ercise price of $95. Next, we have the expiration months (June, July, and August). All
CBOE options expire on the third Friday of the expiration month.
The remaining four columns give volume (Vol.) and price (Last) information for call
options and then put options. The volume information tells us the number of option con-
tractsthat were traded that day. One contract involves the right to buy or sell 100 shares
of stock, and all trading actually takes place in contracts. Option prices, however, are
quoted on a per-share basis.
For example, the first option listed would be described as the “RWJ June 95 call.”
The price for this option is $6. If you pay the $6, then you have the right anytime be-
tween now and the third Friday of June to buy one share of RWJ stock for $95. Because
trading takes place in round lots (multiples of 100 shares), one option contract costs you
$6 100 $600.
The other quotations are similar. For example, the July 95 put option costs 280 , or
$2.80. If you pay $2.80 100 $280, then you have the right to sell 100 shares of
RWJ stock anytime between now and the third Friday in July at a price of $95 per share.
Table 14.1 contains a more detailed CBOE quote reproduced from The Wall Street
Journal.From our discussion in the preceding paragraphs, we know that these are
America Online (AOL) options and that AOL closed at 32.28 per share. Notice that
there are multiple strike prices instead of just one. As shown, puts and calls with strike
prices ranging from 25 up to 60 are available. The symbol “...” in a quote means that
that particular contract didn’t trade that day or that the contract is not currently available.
To check your understanding of option quotes, suppose you want the right to sell 100
shares of AOL for $30 anytime up until the third Friday in April. What should you tell
your broker and how much will it cost you?
Because you want the right to sell the stock for $30, you need to buy a putoption
with a $30exercise price. So you call up your broker and place an order for one AOL
April 30put contract. Because the April 30 put is quoted at $4.10, you will have to pay
$4.10 per share, or $410 in all (plus commission).
Of course, you can look up option prices on the Web. To do so, however, you have to
know the relevant ticker symbol. It turns out the option ticker symbols are a bit more
Call Put
Option/Strike Exp. Vol. Last Vol. Last
RWJ 95 Jun 120 6 80 2
100 95 Jul 40 650 100 280
100 95 Aug 70 8 20 4CHAPTER 14 Options and Corporate Finance 455Check out these options
exchanges:
http://www.cboe.com
http://www.pacificex.com
http://www.phlx.com
http://www.kcbt.com
http://www.liffe.com
http://www.belfox.be