use of call_and_put_options

Jun 28th, 2015
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Abraham Lincoln University
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A “Put Option” as understood in common parlance is an option to sell. A “Put Option” is an Investor’s exit/liquidity option by way of which an Investor can, on the happening of a “Put Trigger” event, compel the promoter/ shareholder of Company to buy its shares either wholly or partly, at a valuation, agreed between the parties. A “Put Option” has become a popular exit option in business practice and has found expression by way was a “Put Option” Clause in Share Holders Agreement (SSA) or Share Subscription Agreements (SHA). This right to sell is not vested in a shareholder by way of law but is a creation of contractual arrangement between the parties. Thus if “Put Option” is not provided in the SSA or SHA then the investor/ shareholder cannot exercise such right to sell.

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Option Strategies1. Long CallProfit: Unlimited in a rising market.Loss: Limited to the initial premium.Break-even: Reached when the underlying rises above the strike price A, by the sameamount as the premium paid to establish the position.2. Short CallProfit: Limited to the premium received from selling the call.Loss: Unlimited in a rising market.Break-even: reached when the underlying rises above the strike price A, by the sameamount as the premium received from selling the call.3. Long PutProfit: Effectively unlimited in a falling market.Loss: Limited to the initial premium paid.Break-even: Reached when the underlying falls below the strike price A by the sameamount as the premium paid to establish the position.4. Short PutProfit: Limited to the premium received from selling the put.Loss: Unlimited in a falling market.Break-even: Reached when the underlying falls below the strike price A by the sameamount as the premium received from selling the put.5. Long Call SpreadProfit: Limited to the difference between the two strikes minus net premium cost. Maximumprofit occurs where the underlying rises to the level of the higher strike B or above.Loss: Limited to any initial premium paid in establishing the position. Maximum loss occurswhere the underlying falls to the level of the lower strike A or below.Break-even: Reached when the underlying is above strike A by the same amount as the netcost of establishing the position.6. S

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