Question

-Discuss put and call options – what right do they provide to the holder?

-Use the Internet to find current option contracts that are available for purchase

-Provide an example of how an investor can profit from a call option and from a put option using the option contracts that were extracted above

Answer 1

Put options provide the holder of put options the right, but not obligation to sell the underlying asset at the strike price of the put option. Call options provide the holder of put options the right, but not obligation to buy the underlying asset at the strike price of the call option. Options of any underlying asset will typically exist for a range of strike prices (with a fixed interval) above and below the actual price of the underlying asset.

Options also have expiry dates. On expiry date, the option will be either exercised by the holder or it will not be exercised. The option will be exercised if it is beneficial to the option holder to do so.

• In case of put options, it is beneficial for the holder to exercise the option if the actual price of the underlying asset is less than the strike price of the put option. This is because the option holder can sell the asset at a price higher than its actual price because they have the right to do so by virtue of holding the put option.
• In case of call options, it is beneficial for the holder to exercise the option if the actual price of the underlying asset is more than the strike price of the put option. This is because the option holder can buy the asset at a price lower than its actual price because they have the right to do so by virtue of holding the call option.

Buyers (holders) of options pay a premium for this right.

Many options are cash-settled. That is, in case of options being exercised, the underlying asset is not actually bought or sold by the option holders. Rather, the difference in price between the strike price and the price of underlying asset is received by the option holders from the option writers/sellers

For example, let us look at options on the S&P 500 of April 2019 expiry :

the call option of 287 strike price is trading at $1.36 and the put option of 282 strike price is trading at $1.47

A 287 call option today will cost $1.36 to buy. If on expiry day the S&P closes at 290, the profit to the call option holder is (290 - 287 - 1.36), which is $1.64. We deduct 1.36 as this is price paid to buy the call option

A 282 put option today will cost $1.47 to buy. If on expiry day the S&P closes at 278, the profit to the call option holder is (282 - 278 - 1.47), which is $2.53. We deduct 1.47 as this is price paid to buy the put option