Unit 7: Discussion Questions 4 4 unread replies. 4 4 replies. Each unit you will find discussion questions related to the chapters covered. Please answer one of the assigned questions from each assigned chapter. Each unit you will find a “Discussion” thread to be used to post your answers to the chapter discussion questions. Please select a question, develop a complete answer, and post it in the thread. You should also respond to a fellow student’s answered question by reinforcing their work or adding additional information or ask for clarification in regards to their answer. Chapter 15: What is an option? Distinguish between a call and a put option. When are options “in the money” and when are they “out of the money”? What is the role of the Options Clearing Corporation? What are the risk and return differences between investing in options versus stocks? Distinguish between a covered call and a protective put.

Call and Put Option

A call option is considered as a contract that is made between a seller and a buyer in which the buyer is charged with the right of buying the existing asset through a given date at the agreed price. In purchasing a call option, one typically acquires the right to buy the financial good on or before the set date in the future and at a fixed price (Cremers & Weinbaum, 2010). On the other hand, a put option can be viewed as an option contract existing between two distinct groups, buyer, and seller, whereby the buyer must sell the existing asset through a given date at the strike price. In this scenario, the buyer of the option is required to pay the premium with the aim of gaining such an obligation. When a person acquires a put option, he or she earns the right to sell the stocks, on or before a given future date at a given price.

Therefore, the rights that is in the hands of a buyer to acquire the real security through a given date for the strike price however not obligated to do so is typically referred to a call option. On the other hand, when the rights are in the hands of the purchaser to sell the existing security through a given date for the strike price however not obligated to do so, then it is referred to as a put option. In other words, a call option gives opportunities for buying an alternative, while put option only encourages selling choice. The call option also generates cash when the end value of the existing asset escalates while the put option creates money when the overall cost of security reduces (Piterbarg, 2010). Therefore, a person who strategically invests in a call option expects the prices to escalate to gain more profits and advantages, whereas the put option requires the rates to reduce with the aim of achieving benefits or else one will be subjected to constant losses.

References

Cremers, M., & Weinbaum, D. (2010). Deviations from put-call parity and stock return predictability. Journal of Financial and Quantitative Analysis, 45(2), 335-367.

Piterbarg, V. (2010). Funding beyond discounting: collateral agreements and derivatives pricing. Risk, 23(2), 97.