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DQ 2 WEEK 6

Subject

Business

Type

Homework

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Running head: OPTIONS 1
OPTIONS
Name:
Course:
College:
Tutor:
Date:

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OPTIONS 2
Analyze the ways in which a call option differs from a put option. Suggest the
circumstances under which an investor would use each. Provide an example of instances
where each option would be utilized.
Options give one the right to conduct a transaction of a security at a set predetermined
price that is set within a specified period. Even though it is not required in the Call option, one
has the right to buy a certain agreed upon quantity of a commodity or product (also referred to as
the underlying asset) from the seller within a certain specific set date (the expiry date/period)
also set for a certain fixed price which is referred to as the strike price (Morris, & Newman,
2004).
On the contrary, a put option gives one the right to sell the commodities or rather the
underlying stock at a certain date at a certain predetermined strike price.
When purchasing a call option, it is done with only the hope that the underlying stock does not
rise above the strike price while a put option is purchased only with the hope that the underlying
stock drops significantly below the strike price (Morris, & Newman, 2004).
Investors should familiarize themselves with different various strategies before settling
on a certain investment. They should learn how options operate before engaging in any
investment.
A certain stock is trading at $10,000. An investor is sure that the stock will soon advance to
$12,000. He then decides to buy a contract of the December 200 calls at a premium of $200. The
total cost of the transaction is $2,000,000 plus the commissions. The second option is buying the
stock outright at a cost of $10,000,000.

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OPTIONS 3
If turns out that the investor was right, and the stock does rally up to $12,000 the
December 200 calls will advance to $2,000. This is a huge gain to the investor (900% gains). In
this case buying an option was the correct move since if the investor had bought the stock at an
outlay of $10,000,000, the return from the investment would just have been a mere 20%
compared to the 900%.
Determine two (2) advantages that an investment timing option has over other alternatives.
Provide two (2) examples that demonstrate the use of investment timing option in a real-
world situation.
Cost efficient
Options are associated with their high leveraging power. Investors who use options are
able to obtain a position in the option that imitates the stock position almost identically. They
lower the cost experienced thus saving huge costs.
High potential returns
Opinions pay off to the investors. Opinion reduces the cost that is spent but makes huge
profits thus increasing the percentage of the returns.
Provide more strategic alternatives
Options offer more investment alternatives thus increasing the flexibility of investment or
firm. Position synthetic is the usage of options to create several other alternatives (Gross, 1999).
Scenario sample
If one wants to purchase Schlumberger because they think it will be improving and going
up over the next several months. As an investor, someone buys 200 shares while the company is

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OPTIONSName:Course:College:Tutor:Date:Analyze the ways in which a call option differs from a put option. Suggest the circumstances under which an investor would use each. Provide an example of instances where each option would be utilized.Options give one the right to conduct a transaction of a security at a set predetermined price that is set within a specified period. Even though it is not required in the Call option, one has the right to buy a certain agreed upon quantity of a commodity or product (also referred to as the underlying asset) from the seller within a certain specific set date (the expiry date/period) also set for a certain fixed price which is referred to as the strike price (Morris, & Newman, 2004).On the contrary, a put option gives one the right to sell the commodities or rather the underlying stock at a certain date at a certain predetermined strike price.When purchasing a call option, it is done with only the hope that the underlying stock does not rise above the strike price while a put option is purchased only with the hope that the underlying stock drops significantly below the strike price (Morris, & Newman, 2004).Investors should familiarize themselves with different various strategies before settling on a certain investment. They should learn how options operate before engaging in any investment.A certain stock is trading at $10,000. An investor is sure that the stock will soon advance to $12,000. He then decides to buy a contract o ...
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