Question

Responses to the discussion questions to be between 150 and 250 words long. However, it is fine if your response is a little

longer. What is important is that your response should be clear and comprehensive, and explain all key point

4. a) Explain the difference between a call option and a put option. (5 points)

    b) You are expecting the euro to go up in value against the dollar and would like to make a profit based on this view. You are trying to decide between two choices:

buying a call option on the euro and selling a put option on the euro. Explain one

advantage and one disadvantage of each of these choices. (10 points)

Answer 1

Answer(4): (a): Difference between a call option and a put option: Points are as following:

	Call	Put
Definition	It is a right but not the obligation to buy an underlying at a specified price at a specified time.	It is a right but not the obligation to sell an underlying at a specified price at a specified time.
When is taken	Call is bought when investor is bullish towards a particular stock or overall market.	Put is bought when investor is bearish towards a particular stock or overall market.
Profit	When stock market or underlying goes up, Call gives profit.	When stock market or underlying comes down, Put gives profit.

(b): Buying a call option: Call is bought when investor is bullish.

Advantage: Loss is limited to the premium paid and profit is unlimited as the upside is unlimited.

Disadvantage: There is 100% loss of the premium. Call price is affected by many factors like Delta, Gama, Beta etc. Out of the money call options lose their value very soon.

Selling a put option- Put is sold when investor is bullish.

Advantage: Investor can keep the premium when Put becomes zero. This is beneficial in Out of the money options.

Disadvantage: Profit is limited to the premium received but loss is unlimited. This strategy is not suitable for beginners.