Ge Stock Option

Option Markets & Instruments (FINC-725)

Internet Project

Spring 2007

Submitted by:

Bhavsar Ankitkumar (0470743)

(201) 360-9586

ajbhavsar@gmail.com

General Electric Stock Option

Introduction:

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.

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:

1) Profit equation

2) Different holding period

3) Buying and selling stock based on option/call prices.

4) Buy a call and sell a call

5) Buy a put and sell a put

6) The covered call

7) The protective put

8) Call delta, gamma, rho and theta

9) Interpretation 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 America's 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.

1. Buy a call

2. Sell a call