Question

Does a corporation on whose stock an option is written receive any funds from the transaction?

Can option holders vote for corporate directors?

What is the objective of a hedge portfolio in the Binomial Option Pricing Model?

Answer 1

Option is just the like betting between two people on the price of the stock where one person expects the price will go up and other person thinks the prices will go down. The winner in the betting gains. Option is just secondry market game, there is no involvement of company in option transaction. Hence a corporation on whose stock an option is written shall not receive any funds from the transaction.

Option holder dose not hold any corporate right(voting or dividend) in the company. He/she can not vote for corporate directors untill he/she buys shares (if option excercised). If the shares are baught, he/she will become shareholder and start having all the rights which are to be exercised by shareholders in the company.

A hedged portfolio is created by buying the stock and writting options. The objective is that it helps offset price movements.

Suppose a person buys a stock at $100 today, if he anticipates the price may go up to 110 or go down to $90 in one year,he can write a call option at stike price of $110 and buy a put option at strke price of $90. By doing this his expected gain/loss shall be limited to $10 only because if the price go above 110 he will gain on stock but lose on option sold. And if the price go below 90 ,he will lose on stock but gain on put option baught. By hedging it becomes easy to mathetically calculate the price of the option because future cash flows becomes certain.

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