Question

A writer of a call option will want the value of the underlying asset to ________, and a buyer of a put option will want the value of the underlying asset to ________.

	A.	decrease; decrease
	B.	decrease; increase
	C.	increase; increase
	D.	increase; decrease

Answer 1

For answering this question you need to know about

• What is call and put option?
• When the options will be exercised or lapsed?
• profit in the prospective of buyer and writter

What is call and put option?

• Call option gives the buyer of the option the right to buy.
• Put option gives the buyer of the option the right to sell.
• Call option gives the writer of the option the obligation to sell.
• Put option gives the writer of the option the obligation to buy

When the options will be exercised or lapsed?

• A call option is exercised (in the money) when it is profitable to the buyer of the call option. That is when, exercise price<market price. In such situations buyer can buy that particular underlying asset at a cost which is lower than the market price.
• A put option is exercised (in the money) when it is profitable to the buyer of the put option. That is when, exercise price>market price. In such situations buyer can sell that particular underlying asset at a price which is higher than the market price.

profit in the prospective of buyer and writter

• When the option is exercised, buyer will make profit, on the other hand writer incurs loss.
• so the buyer wants the option to be in the money, whereas writer wants it to be out the money or lapse.

A writer of a call option will want the value of the underlying asset to decrease, and a buyer of a put option will want the value of the underlying asset to decrease