strategy in call_and_put_options

Jun 28th, 2015
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If the stock falls below the Put strike, the investor will be exercised and will have to buy the stock at the strike price (which is anyway his target price to repurchase the stock). The investor makes a profit because he has shorted the stock and purchasing it at the strike price simply closes the short stock position at a profit. And the investor keeps the Premium on the Put sold.

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Option Basics GoalsAll these slides (slides1-38) are covered in the OptionBasics lecture video (43:10 long) What are options? Why are they useful? Howare they valued? Why do we care? Option valuation is useful both directly andconceptually in many aspects of finance. Capital Structure Capital budgeting (real options, embedded options) Hedging and risk management Hedging vs. Speculating Agency Problems1Options and Derivatives Derivatives are simply a class of securities whoseprices are determined from the prices of otherassets. The asset on which the derivatives value isbased is called the underlying or primary asset. Options, futures, and swaps are just some examplesof derivatives Options are traded on various underlying assets. Individual stocks as well as stock indexes Futures, Foreign currency, Interest rates Financial engineering is the practice of combiningderivatives to construct specialized financialarrangements2Option Contracts A call option gives the holder the right(but not the obligation) to buy an asset fora specified price (strike or exercise price)on or before a specified expiration date. Example: A MSFT July 120 call would givethe buyer the right to purchase 100 shares ofMSFT stock at $120 per share on or beforethe third Friday in July. Why would someone want to buy thisoption?3Call Options Call options give investors the right to BUYan asset at

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