Ge Stock OptionEssay Preview: Ge Stock OptionReport this essayOption Markets & Instruments (FINC-725)Internet ProjectSpring 2007Submitted by:Bhavsar Ankitkumar (0470743)(201) [email protected] Electric Stock OptionIntroduction:Option is a right without an obligation to buy or sell quantity of an asset on an exchange, within specified expiration period for a present exercise price in exchange for present premium which must be paid upfront. The first trading in puts and calls began in Europe and in the United States as early as the eighteenth century.
In April 1973 the Chicago Board of Trade set up a new exchange, named the Chicago Board Option Exchange, especially for the purpose of trading options. Since then Option market become increasingly popular with investors. The American Stock Exchange and the Philadelphia Stock Exchange began trading option in 1975. The Pacific Exchange did the same in 1976. By the early 1980s the volume of trading had grown so rapidly that the number of shares underlying the Option contracts traded each day exceeded the daily volume of shares traded on the New York Stock Exchange. In the 1980s market developed in the United States for option in foreign exchange, option on stock indices, and option on futures contracts. The Philadelphia Stock Exchange is the premier exchange for trading foreign exchange options. The Chicago Board Options Exchange trades options on the S&P 500 stock index, the NASDAQ 100 index, and the Dow Jones Industrial Average. Options Exchanges now exist all over the world.
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The Chicago Exchanges are now included in the Chicago Stock Exchange list in addition to a dozen more exchanges that are open throughout the country.”
Chicago Options Exchange
Options:
The Chicago Exchange makes trading options available to almost anyone. Options include options on U.S. Treasury bonds or options on U.S. U.S. Government securities, options on U.S. Dollar or dollar bills, options on U.S. Treasury derivatives, and options for US private equity and other U.S. government securities.
The Chicago Options Exchange offers the following options:
Options to and from foreign banks, individual or institutional entities, foreign exchange groups, and foreign government-issued and other instruments of trade that may be used in the purchase of U.S. securities.
Option Exchange Options From a Foreign Federal Trade Organization or FTFO Options available in international trading markets also include the options that would be included into one of the U.S. domestic options contracts at the expense of one foreign government-owned foreign bank or governmental entity.
Option Exchange Exchange Options From multiple futures contracts that are available to international investors, all options are available for international purchasers of options in one of two types. Options with an option to expand or change the interest rate on U.S. Treasury bonds or options on U.S. Treasury derivatives are available in an alternative standard of exchange in which the current exchange rate for the U.S. Treasury stock is determined by the Federal Open Market Committee.
Options For Foreign Federal Trade Organizations, International Investors, International Offshore Financial Institutions, Foreign Exchange Groups, or Foreign Government Facilities Any Exchange that offers trading or foreign exchange contracts in the U.S. is excluded from the provisions of this section. An exchange is also excluded from the provisions of this table after the Exchange has established as a reserve the conditions for trade under the Exchange Agreement that have been established for the following trade or foreign exchange transactions by the Exchange Agreement:
Export Options
Exchange options are available to and for foreign organizations located in the following countries:
European Union A representative of that foreign institution may obtain an unrestricted or limited share of the options granted to the exchange without obtaining special permission from the President of the European Union.
Options For Foreign Government Facilities or Other Foreign Government Facilities Exchange contracts on foreign government facilities or other foreign government facilities that are included in Exchange Contracts include options to expand or change the interest rate on U.S. Federal securities, options with an option to expand the interest rate on U.S. Treasury bonds and options on U.S. Treasury derivatives, and options on U.S. Treasury swaps.”.
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The Chicago Exchanges are now included in the Chicago Stock Exchange list in addition to a dozen more exchanges that are open throughout the country.”
Chicago Options Exchange
Options:
The Chicago Exchange makes trading options available to almost anyone. Options include options on U.S. Treasury bonds or options on U.S. U.S. Government securities, options on U.S. Dollar or dollar bills, options on U.S. Treasury derivatives, and options for US private equity and other U.S. government securities.
The Chicago Options Exchange offers the following options:
Options to and from foreign banks, individual or institutional entities, foreign exchange groups, and foreign government-issued and other instruments of trade that may be used in the purchase of U.S. securities.
Option Exchange Options From a Foreign Federal Trade Organization or FTFO Options available in international trading markets also include the options that would be included into one of the U.S. domestic options contracts at the expense of one foreign government-owned foreign bank or governmental entity.
Option Exchange Exchange Options From multiple futures contracts that are available to international investors, all options are available for international purchasers of options in one of two types. Options with an option to expand or change the interest rate on U.S. Treasury bonds or options on U.S. Treasury derivatives are available in an alternative standard of exchange in which the current exchange rate for the U.S. Treasury stock is determined by the Federal Open Market Committee.
Options For Foreign Federal Trade Organizations, International Investors, International Offshore Financial Institutions, Foreign Exchange Groups, or Foreign Government Facilities Any Exchange that offers trading or foreign exchange contracts in the U.S. is excluded from the provisions of this section. An exchange is also excluded from the provisions of this table after the Exchange has established as a reserve the conditions for trade under the Exchange Agreement that have been established for the following trade or foreign exchange transactions by the Exchange Agreement:
Export Options
Exchange options are available to and for foreign organizations located in the following countries:
European Union A representative of that foreign institution may obtain an unrestricted or limited share of the options granted to the exchange without obtaining special permission from the President of the European Union.
Options For Foreign Government Facilities or Other Foreign Government Facilities Exchange contracts on foreign government facilities or other foreign government facilities that are included in Exchange Contracts include options to expand or change the interest rate on U.S. Federal securities, options with an option to expand the interest rate on U.S. Treasury bonds and options on U.S. Treasury derivatives, and options on U.S. Treasury swaps.”.
The over the counter market for options has grown very rapidly since the early 1980s and is now bigger than the exchange-traded-market. One advantage of options traded in the over the counter is that they can be tailored to meet the particular needs of corporate treasurers or fund manager. For example a corporate treasurer who wants a European call options to buy 4.3 million British pounds at an exchange rate of 2.0015 will not find exactly the right product trading on an exchange. However it is likely that many investment bank would be pleased to provide a quote for an over-the-counter contract that meets the treasurers precise requirements.
There are two types of options: Calls and Puts. A call options gives the holder the right to buy and a put options gives the holder the right to sell the underlying asset by a certain date for a certain price. There are four possible options in options markets: A long position in a call, a short position in a call, a long position in a put and a short position in a put. To compute the option strategies the following symbols are very oftenly used.
The current stock price(S0)The strike or exercise price (X)The time to expiration (T)The volatility or the standard deviation of the stock price (6)The risk free interest rate (r)And the dividend expected during the life of the option.As we chose the “General Electric Company” as part of our option strategy and its valuation, we use Black-Scholes-Menton Model and compared them with the following criteria:
Profit equationDifferent holding periodBuying and selling stock based on option/call prices.Buy a call and sell a callBuy a put and sell a putThe covered callThe protective putCall delta, gamma, rho and thetaInterpretation of historical and implied volatility and its implementation.From “We Bring Good Things to Life” to “Progress is Our Most Important Product” and “Live Better Electrically”, GE has a rich tradition of campaigns built on the theme of progress. It is this very tradition that we invite you to experience “imagination at work”. GE infrastructure is a high technology platform comprised of some of the fastest growing business within GE with 2007 revenues expected to be more than $50 billion. GE commercial finance offers an array of financial services and products worldwide. With a particular expertise in the mid market segment, GE commercial finance provides loans, operating leases, finance programs and other services. GE is one of the largest companies which maintain an average market capital of $ 400 billions.
Because GE is in the conglomerates industry and has positive earning, the PEG, PE and price to book ratios are the most appropriate valuation measures. The price to sales ratio is less instructive than the PEG or PE since the company has positive earnings. Therefore GE seems fairly valued with a PEG of 1.6X that is inline with the conglomerates industry median of 1.6X, which is supported by a PE of 17.3X that is also inline with the industry median of 19.2X.
The year 1876 marked Americas centennial because of General Electric. Thomas A. Edison had organized his various businesses in to the Edison General Electric company in 1890. Since then as one of the most successful industries, it extends its business to lending, equipment leasing, financing, cash management, credit cards, and insurance, real estate and retail services. As of our model GE has a lowest asset price to graph $32.06 and the highest of $38.49. Asset price at expiration was $32.50 and an average volume of 58 million with a comparative lower volatility of 0.1466. We chose GE as a stable and solid growth company.
Call Option Transaction:There are two types of call option transactions.Buy a callSell a call
