耶魯大學(xué)金融市場(chǎng)英文文本Financial-MarketsLecture-23-Transcript.doc

Financial Markets: Lecture 23 Transcript Professor Robert Shiller: Today I want to talk about options. I should just say what an option is. Ill write the word. Its a contract that has an owner and the owner of the option contract has rights to find in the contract either to buy or sell some thing-lets say a share of stock-at a specified price and specified date. There are two kinds; theres a put and a call. A put option is the right to sell. Its typically a hundred shares, so well say a hundred shares of a company; lets say its Google. The option would have-if it was a put option and there was a price, then you would have the right up-let me see, theres the exercise price, also known as the strike, and theres the exercise date. I should also emphasize that there are two kinds of options. There are American, so called, and European, so called. It has nothing to with whether they are in America or Europe because in Europe they trade both American options and European options and in America they trade both American options and European options; so, its very unfortunate terminology. The American-what this means-an American option means the right to exercise the option on any date until and including the exercise date; with European, its only on exercise date. Thats what those words mean. So, usually were talking about American options. If you have an American option-American put option-on shares of some stock, then you have the right anytime you feel like it, until the exercise date, to sell that option at the price specified in the contract, called the exercise price. If its European, you have to wait until the exercise date and then you have one day when you can do that. A call option is the right to buy a share of stock or whatever it is-whatever is specified in the option. In a traditional option, there are two parties; theres the buy of the option and usually we present them from the perspective of the buyer of the option. The buyer of the option pays a price to buy the option-not to be confused with the exercise price-and then, depending on whether its American or European, has until the exercise date to exercise the option; but, the buyer doesnt have to do anything. You can just do nothing; you can buy the option and if you do nothing it becomes worthless because the only way the option ever gives you value after you buy it is if you exercise it, meaning you say, I will use my right to buy or sell. The other party is the writer of the option. Because its a contract, it has to be between two parties. Somebody is on the other side and you can do either one; you can either buy or write an option. If you-let me make this clear; if you write a call option, then what you are committing yourself to do as the writer-you sign the contract from the writers contract, which goes along with the buyers contract. Well, it provides rights to the buyer. If you write a call option, then you-and say its American-then you are signing a contract -lets say its on stock-to deliver one hundred shares to the other guy, the buyer, whenever that guy feels like it. That guy will pay you the contracted price, so its not-it doesnt seem like much fun to be a writer of an option because you have-youre just sitting there waiting for this other person to make up his or her mind. Theres a benefit; mainly, you get the money. The buyer of the option pays you up front for providing this right to the buyer, so writers of options write them hoping that they expire unexercised; thats when they make money. If you write an option and the buyer of the option pays you the money up front and then you never hear from the buyer again, then youre-thats the way you like it. So, you make money by writing options and hoping that they dont get exercised. Of course, you can write a put option and that means-if you write a put option, you are signing a contract that says that whenever this other guy on the other side, the buyer, decides to, that guy will sell you a hundred shares at the specified price. Again, youre laying yourself open to, whenever this guy wants to, youve got to receive a hundred shares and pay the money. Now, these kinds of contracts are very old and, in fact, we had a conference over the weekend at the Yale School of Management on-it was a very interesting-Ive never experienced anything quite like it. Maybe I should put the website up for you to look at. Theres a book; its called The Great Mirror of Folly, written in 1720 about the stock market and the Beinecke Rare Book Library has a copy of it. Theyre very rare-about the stock market crash of 1720. Did you know that there was a big stock market crash in the year 1720? What was happening in New Haven in 1720? Well, I know one thing that was happening in 1720 in New Haven-Im guessing; Im pretty sure. You had some pretty angry investors who lost everything in the stock market, but it couldnt have been the U.S. stock market, which wasnt created yet. The crash of 1720 was primarily in Paris and London, also less so in Amsterdam; those were the financial centers of the world. So, Im speculating there must have been someone here in New Haven; probably Yale University lost in this crash-I dont know. There must have been someone here who lost-it was a huge and devastating stock market. This is the first one actually; the first stock market crash. We had a lot of fun at this conference; it just relates to options. Ill tell you why it relates to options, because people were writing options galore in 1720 on stocks. The book-if you search on Great Mirror of Folly on the Web, itll come up with our conference and proceedings. Since this book-copyrights expire after, well, its a complicated formula, but in less then a century. So, this is all public domain, so Yale has it up on the Web and you can read the whole book. Unfortunately, its written in Dutch, which might deter some of you, but it has lots of pictures. We had great-at this conference, the-it was the most interdisciplinary conference Ive ever seen because we had professors from the Art History, Comparative Literature, Finance, Economics, and Psychology. We had scholars from all over the world who knew about the year 1720, including a lot of Dutchmen who were here. Anyway, the highlight of it was-one highlight for me was, it had a-we saw a picture of an option from this time-an option contract to buy stocks from Amsterdam. It showed it was a printed form; they had printed forms back then, at least in Holland they did. So, a printer had printed up with blanks to fill in. Theres a place to fill in the exercise price and the exercise date. I dont know whether it was American or European at the time, but Im sure if it was American they didnt call it an American option in 1720. They didnt even call them options. Of course, its all in Dutch, so I dont know; it was some other word-not options. Im just saying this because the-The other interesting thing about 1720 is that they didnt make the same distinction between investing and gambling that we do now. Right now, anyone on Wall Street is very loathe to have any suggestion of connection with gambling, but back then they didnt care. So, lots of stocks would have lotteries attached or there would be all kinds of-something called a tontine, where a group of investors would invest in something and then all the money would go to the last one to die, after all of them died but one. Thats a sort of gambling; I dont know what sense it makes, but they did that. I remember an old story on-I just heard this somewhere-from the 1920s. Two brokers on the New York Stock Exchange floor were talking to each other and one of them says, Ill be you $5 that the markets going to go up. Then the senior man scolded him and said, are you betting? You will be thrown off this floor permanently if I hear that word again. So, that attitude has persisted-that investing should be distinguished from gambling. I suppose theres good reason for that because gambling instincts can take hold of us and investing has a good purpose. Unfortunately, our emotions can carry us away from the good purpose and gambling is not investing. Back in 1720, the distinction was not so clear and this event was so-it got-the reason they called the book The Great Mirror of Folly is that the event got totally crazy. People were squandering their life fortunes. Ill tell you one more story. We had a great time at this conference because this book, Mirror of Folly, includes plays that were written in 1720 and performed in Amsterdam about the crash-about the stock market crash. The organizers of this conference got some students from Saybrook College to perform one of the plays from Great Mirror of Folly. Is anyone here from Saybrook? Okay, you werent in the-I didnt see you there though. There was a scene in the play where the young woman was being told by her father that he intends for her to marry a very promising young man who is speculating in stocks and will soon be rich. She is very skeptical about being forced to marry; she has somebody else in mind. The father says that the other young man is worthless; hell never amount to anything. But, she stuck by her guns and insisted that I will never marry a man whos in love with the stock market. We dont know what happened because its all fictional, but as we know, the whole stock market crashed, so she was right on two counts probably. Anyway, thats all about-options are very old, but theyve emerged more recently as very important contracts. In particular, what they didnt have in 1720-in fact, they didnt have anywhere until recently-is an options exchange. The problem with a traditional option is that its a contract between two parties. If you write-if you buy an option, youre at the mercy of this other person. So, if you buy an option that was written by a broker, as they were in 1720, what if the other guy doesnt-he just skips town; hes gone. You bought this option to either buy or sell and then when the date comes you cant find this guy. So, what do you do? You obviously were cheated out of your money. So, we created-that was a problem until 1973, when the first options exchange opened. Well, I think there may have been ways of dealing with the problem, but not before 73. But, this is the first options exchange-Chicago Board Options Exchange-which was a spin off of the Chicago Board of Trade. Now, what they did was they organized a central marketplace for standardized options. Options used to be written for whatever exercise date anybody wanted; there was no standardization. An options exchange is like creating a futures market when you only had a forward market in the past. They started trading options on U.S. stocks in 1973 and they require that the writer of a naked call has to put up margin. What is a naked call? If you write a call, you are standing ready to sell a hundred shares to the buyer, whenever that buyer decides-if its American-to do that. But youre naked if you dont own the hundred shares. One way you can do it is, you can show that you own a hundred shares, so theres no way that you could fail to deliver. If youre naked, then you are required to put up margin and the margin is an amount that was enough so that if you fail to deliver, the CBOE could access your margin account and buy the shares on the market to sell to the buyer; thered be enough money to do that. The margin requirement for the writer makes the contract secure so that there is really no counterparty risk with options purchased on an options exchange. Now, there are many options exchanges, but the CBOE-Im just listing it-was the first. Now, futures exchanges sell options on futures; thats the same thing as an option on a stock, but instead of a stock contract, its a futures contract. That would be done at the CME Group, which is a futures exchange. Thats just-were just talking about where you can do these things. Did I explain the concept of options? Maybe I should go through the-I have here a plot illustrating a call option. On the vertical-on the horizontal axis, I have stock price; thats $0 a share, $5 a share, $10 a share. Im showing it up to $45 a share. Now, Im going to illustrate the intrinsic value of an option with a $20 strike price. Now, the option would be typically for 100 shares, but Im going to describe it as if it were an option to buy one share; so, it would be 1/100th of a typical option. This broken straight line is what we call the intrinsic value of the option, which is the money you could get if you exercised it right now. If you decided-well never have intrinsic value negative because you wouldnt exercise. So, let me explain what this means. Suppose you own an option with an exercise price of $20 and the price of a share is $15. What is the value of that option today-the intrinsic value? Well, its nothing because the option gives me a right to buy a share at $20, but hey, I can buy it under the stock market for $15, so I would never exercise the option today. It would be worthless; it would be worth minus $5 if I exercised it today because I would be paying $20 for something I could get for $15, but Im not going to call it minus 5; Im going to call it 0 because you just-you wont exercise. If the stock price is below the exercised price, I have a value. On the vertical axis is the intrinsic of the call; I have to distinguish it between actual value. This isnt the price that is quoted for the option; this is what it would be worth if you exercised it today if it were-the option has value beyond its intrinsic value because even though its worthless today, it might be worth something in the future. Ill come back to that but this is just-Im just talking about intrinsic value. Now, what if the stock price is $30 today. What is the value of the option-the intrinsic value? Well, its going to be $10, obviously, because if you exercise it today, youre buying the stock for $20 and you can sell it today for 30 on the stock market; so, the difference is 10. This line here-it doesnt look like a-this is a 45 angle here-doesnt look like it, but thats what it is. It has a slope of one. Its very simple; the intrinsic value for a call is just a broken straight line; it breaks at the exercised price. To give you a little bit more jargon, in this region we say the option is out of the money. That means, exercised today, it would be worthless. This one right here is called at the money. If the stock price is equal to the exercised price, then the stock-wed call the option at the money, for a call. Here, if the stock price is above the exercise price, we say its in the money. This line goes off into infinity; I just stopped it there. Thats straightforward, right? Anyway, this does illustrate something about options that is different from anything weve discussed before. This is a broken straight line, not a straight line. All of our talk about portfolios to date has been linear. When you combine stocks, you are making your portfolio respond linearly to the return of any one of the stocks in the portfolio, but this is non-linear because we have a break; thats what options do, so its non-linear finance. Some people are confused about what options really are. Often people say, well if I buy a stock option that means I can make up my mind later whether I want to buy and sell. So hey, Im just getting the right to be indecisive or to-well, think of it this way-I havent made up my mind whether I really want to invest in options or not-in stocks or not-so, Ill buy an option and that gives me the right to buy. You could say that and a lot of people think that way. Like, a company will think, were trying to decide whether we want to build this shopping center. So, well buy an option on the land underlying where we would build the shopping center and well think more about it and decide whether its a good idea to build a shopping center. You could do that, but theres something a little bit misleading about that reasoning because whether or not you decide to build the shopping center, if you buy an option on the land you will always exercise it if its in the money on the exercise date-whether you build a shopping center or not. Suppose you couldnt decide whether to build a shopping center and you bought an option on land and then someone comes in and says, well we have to make up our mind today; the option is exercising-is expiring-if we dont exercise it today its worthless. What do you discuss at your meeting? You dont discuss whether were going to build the shopping center or not; thats irrelevant. You discuss, what can we sell the land for and if we can sell it for more than the exercise price, we will always exercise it. So, theres no-the assumption in finance is that all options that are in the money on the exercise date are exercised and theres no choice. The word option might be misleading because-you could choose to be dumb and not exercise it, but thats not what its about. On the other hand, options really are central to our thinking about a lot of things. Ill give you an example of an option that you might not consider an option. This is the option to marry somebody. Sometimes people will complain that their boyfriend or girlfriend cannot commit. Weve been going out for three years; its time that we get married, but this person-the counterparty-cannot seem to decide. Actually, one view of it-of that situation-could be that this person is just better schooled in finance than the other because one principle of finance is that you should never exercise an American call early. Im not this cynical about relationships; Im just telling you a story that comes to mind. Youd never want to-Ill com