Question

explain what a call and put options and what is required of the buyer and seller of each, graph both the call option for the buyer and for the seller and the put option for a buyer and a seller

Answer 1

Call and put options are derivative investments. Their price are based on the value of some other underlying asset.

A buyer buys the call option if the buyer expects the price of the underlying asset to rise within a certain time frame. A put option is bought if the buyer expects the price of the underlying to fall within a certain time frame. Both the options gives buyer certain rights to sell or write the option.

A Call is an options contract that gives the buyer the right to buy the underlying asset at the exercise price at any time before expiry date. The exercise price is the price at which a buyer can buy the underlying asset. In the call option, if the buyer buys the asset at an exercise price before expiry and at expiry the price of the asset is above the exercise price, it will be profitable to him. However, if the price of asset after expiry is less than the exercise price, it will be loss to him. For these rights, the buyer pays a "premium" to the seller.

A Put is an options contract that gives the buyer the right to sell the underlying asset at the exercise price before the expiry date. The exercise price is the price at which a buyer can sell the underlying asset. In the put option, put buyer only exercise their option if the current price of the asset is less than the exercise price. This is because if the current price of the asset is higher than the exercise price, they can sell the asset in the market instead of exercising the option. The put seller/writer receives the premium.