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The first thing to notice here is the company identifier, RWJ. This tells us that these options 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 exercise 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 contracts that 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 between 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 X 100 = $600.

The other quotations are similar. For example, the July 95 put option costs 280, or $2.80. If you pay $2.80 X 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 put option with a $30 exercise price. So you call up your broker and place an order for one AOL April 30 put 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

Check out these options exchanges: www.cboe.com www.pacificex.com www.phlx.com www.kcbt.com www.liffe.com www.belfox.be

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

V. Risk and Return

14. Options and Corporate Finance

© The McGraw-Hill Companies, 2002

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