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

It is dependent upon the need of the option buyer because when and option is purchased in order to you hedge an investment portfolio or cover another position, it is an investment tool which is leading to protection of their investment position and it is helping in generating a overall higher rate of return and minimization of the risk.

when the option is bought and sold in naked position, it will mean that option holder is always trying to take a gamble against the market and it can lead to higher amount of income or high amount of expense so there should always be here differentiation in the nature of option holders to use the options in order to either protect the portfolio or make a high rate of return.

Option is often termed as a wasting asset because it can lead to to destruction of the portfolios because it is a highly volatile derivative instrument which if not managed properly, can be lethal for the portfolio management