Derivatives: Call and Put Options

Posted on Posted in Investment Banking

Put Option: If you buy Put option that means you will benefit if price of asset falls. Example, price of an asset is USD 10 right now, you buy Put option for USD  1 for exercise price of USD 8 with validity of 1 month. Within 1 month if price fell, say, to USD 5 then you will exercise your option and buy asset from market at USD 5 and sell it at USD 8. You got profit of USD 2 (8(exercise  price)-5(current market price)-1(Put option price)).

Call Option:  If you buy Call option that means you will benefit if price of asset increases. Example, price of an asset is USD 10 right now, you buy Call option for USD  1 for exercise price of USD 12 with validity of 1 month. Within 1 month if price increase, say, to USD 15 then you will exercise your option and buy asset at USD 12 and sell it to market at USD 15. You got profit of USD 2 (15(current market price)-12(exercise  price)-1(Call option price)).

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