Question

1. In your view, is option an investment or a gamble? Critically substantiate your arguments. Why an option sometimes is said to be a “wasting asset”?

Answer 1

I think that option is an investment because there is always an intrinsic value that is associated with the the investment and there is always an intrinsic value which is associated with the option, so options will always be treated at investment for shorter periods and they have various judgemental criterias like option greeks which can be used for determination of the value of the options like theta, Gamma, etc.

I think options are always providing with opportunities for the investors for saving the value of their investments and increasing the value of their investments also, so it should be treated as a short term investment tool because when there is fall in the market, investors are often taking put options in order to hedge their portfolio and gain through the put options in order to save their reduction in size of investments and they are also buying options in order to increase their overall possibility of earning income in the short-term, so it is always treated as a investment tool,may be it can be a short term investment.

I will not be treating it as a gamble because only out of the money options are treated as gamble whereas in the call money or at the call money options are not treated as gambles because they will have a real possibility of getting exercised and making value for the investor.

Option contracts will generally be having a time value of money component associated with it, and it will be reducing with time till the expiration, so it can be said that when there is a reduction in the time then the value of the option goes down because of the decrease in the time value component so it is a wasting asset because it will decrease with the time.