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Call options allow their buyers to purchase assets from a "counterparty" for a set price--which is called the "strike price." Say, 100 shares of Acme for $25 with expiration in June.

The reason you buy this thing is because you think the price of the asset is going to go up. If Acme stock goes up to $27, you exercise your option and pay $25 per share. If you paid less than $2 per share premium, you'll make money when you sell the stock.

If you exercised the option when Acme was $23, you'd pay $25 for $23 stock--which is a bad investment any way you look at it.

Call prices CAN exceed the price of the underlying asset. It happens all the time, but no one exercises the options when they're like this because you would lose money if you did.

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14y ago

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Does the price of an option increase or decrease as the underlying asset becomes more volatile?

Usually, yeah. (Answerer shrugs...) In the derivatives business there are no absolutes, but in a lot of cases the premium rises with increasing volatility.


Why in short put the seller o a put option has the obligation to buy the underlying asset?

There are three kinds of these options, from the option seller's point of view: covered calls (you own the stock underlying, and you are giving the buyer the right, but not the obligation, to buy it from you at a certain price), naked calls (same thing but you don't have the stock), and puts (you are giving the put's buyer the right to sell you stock at a certain price; technically there are covered and naked puts but to the seller they're equivalent; the buyer has three days to deliver you the stock after you pay him for it, so it doesn't really matter whether he owned it before he entered into the put contract.)In all of these, the seller of the option warrants that he will do whatever it is the contract requires if the buyer exercises the option.


How do you measure the risk of a single asset?

The total risk of a single asset is measured by the standard deviation of return on asset. Standard deviation is the square root of variance. To measure variance, you must have some distribution/ possibility of asset returns. However, the relevant risk of a single asset is the systematic risk, not the total risk. Systematic risk is the risk that cannot be diversified away in a portfolio. Systematic risk of an asset is measured by the Beta. Beta can be found using Regression (between market return and asset's return) or Covariance formula.


What are derivative trades?

Derivatives are financial instruments that derive their price and values from their underlying asset. Examples of derivatives are options and futures. Both options and futures derive their value from their underlying stocks. Trading derivatives means buying options or futures instead of the stocks itself mainly for leverage.


Is a positive balance in your cheque account a asset or liability to you and the bank?

For Bank: Liability For You: Asset

Related Questions

What Is an Underlying Asset in binary options?

An option's underlying asset is a market traded asset, such as currency exchange rate, stocks or bonds, and market indices. Fluctuations in the market value of an underlying asset serve as the basis for the value of an option vis-à-vis an option's strike price.


What is it called when the price specified in an option contract at which the holder can buy or sell the underlying asset?

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the "strike price" or "exercise price." This is a crucial component of the option, as it determines the conditions under which the holder can exercise the option to buy (call option) or sell (put option) the underlying asset.


Difference between put option and call option?

The holder/purchaser/owner of a call option contract has the right to buy an asset (or call the asset away) from a writer/seller of a call option contract at the pre-determined contract or strike price. The holder/purchaser/owner of a call option contract expects the price of the underlying asset to rise during the term or duration of the call contract, for as the value of the underlying asset increases so does the value of the call option contract. Conversely, the write/seller of a call option contract expects the price of the underlying asset to remain stable or to decline. The holder/purchaser/owner of a put option contract has the right to sell an asset (or put the asset) to a writer/seller of a put option contract at the pre-determined contract or strike price. The holder/purchaser/owner of a put option contract expects the price of the underlying asset to decline during the term or duration of the put contract, for as the value of the underlying asset declines the contract value increases. Conversely, the writer/seller of a put option contract expects the price of the underlying asset to remain stable or to rise.


How can one exercise a call option?

To exercise a call option, the option holder can buy the underlying asset at the strike price before the option's expiration date.


How can I exercise a put option?

To exercise a put option, you need to notify your broker that you want to sell the underlying asset at the strike price before the option's expiration date. This allows you to profit from a decrease in the asset's price.


What is the process for exercising a put option?

Exercising a put option involves the holder selling the underlying asset at the strike price before the option's expiration date. This allows the holder to profit if the asset's price falls below the strike price.


When is the best time to exercise a put option?

The best time to exercise a put option is when the market price of the underlying asset is below the strike price of the option, allowing you to sell the asset at a higher price than its current market value.


Why would someone choose to sell a put option?

Someone might choose to sell a put option in order to generate income or profit from the premium received. By selling a put option, the seller is obligated to buy the underlying asset at a specified price (the strike price) if the option is exercised by the buyer. If the price of the underlying asset remains above the strike price, the seller keeps the premium as profit without having to buy the asset.


What does gamma stand for what does it mean?

Gamma is the third letter of the Greek alphabet. In the context of finance and investments, gamma represents the rate of change in an option's delta for a one-point change in the price of the underlying asset. It measures how fast the option's delta will change as the price of the underlying asset moves.


What are the steps involved in exercising a put option?

Exercising a put option involves the following steps: 1. Decide to exercise the option before the expiration date. 2. Notify your broker of your decision to exercise the put option. 3. Provide the necessary funds to purchase the underlying asset at the strike price. 4. Receive the proceeds from selling the underlying asset at the market price.


What is the delta of an option?

The delta of an option is the mathematical parameter that measures how much the price of an option changes with price changes in the underlying asset. For instance, an option with 0.5 delta would gain $0.50 in value with every $1 gain in price of the underlying asset. It will also drop by $0.50 in value with every $1 drop in price of the underlying asset. Take note that delta is also changing all the time due to Gamma so it should be taken more as a research reference rather than an absolute prediction of options prices.


Why should someone buy a call option?

Someone should buy a call option if they believe the price of the underlying asset will increase in the future. By purchasing a call option, they have the right to buy the asset at a predetermined price, known as the strike price, which can potentially lead to profits if the asset's price rises above the strike price.