OPTIONS – PROBLEMS TO BUILD CONCEPT UNDERSTANDING 1. Option Function: a. What happens if a long call is exercised? Explain. b. What happens if a long put is exercised? Explain. c. What happens if a...

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Answered Same DayMay 03, 2021

Answer To: OPTIONS – PROBLEMS TO BUILD CONCEPT UNDERSTANDING 1. Option Function: a. What happens if a long call...

Harshit answered on May 04 2021
156 Votes
Answer to Question 1
a. Long call means purchase of option which means that a trader has a right to buy security in future date at the pre decided price. This is done when the investor things a market is bullish. He anticipates that the market in the future will go up. Adventur
es that he can purchase a share at predetermined price also known as strike price. Open the Future the price actually goes up then he has to pay only the decided strike price which is lower than the market rate that will make profit. Is the prices below the level of strike price he will not exercise the option and the only loss that he will book is the premium amount already paid.
b. Long put means purchase of put option that is the trader is anticipating that the value of an underlying asset or stock will fall at any future date if you believe that the market is very. He enters in a contract thinking that the price of the underlying asset will go down in future. Price goes down as per estimation then he has the right to buy the security at lower price and sell the same at Higher pre-decided strike price. If the price does not goes down then he will not exercise the option and only be book the premium amount paid as loss.
c. Short call means selling of call option. In this day trader has to purchase that stock at a predefined strike price when the contract is expired. Here he thinks that the market is bearish. The trader has the right to sell a security at a predetermined strike price. The price of the stock goes down the trader has right to sell the security at 8 higher strike price has making profit but is the price does not goes down, the trader who has the short call has to exercise option and buy the security at the higher price.
d. Shot put means sale of put option. The trader as the application to sell the stocks at a predetermined strike price is the purchaser of the put option to others to exercise the option. The trader sells the put contract attar pre-determined strike price which is above the stock price. New the shock price is below the strike price the option will be exercised by the buyer. The seller of the option will have to buy the shares a higher price and sell them at a lower price for incurring losses.
Answer to Question 2
    Underlying
    Price
    Strike
    Option
    Option Price
    Intrinsic Value
    Extrinsic Value
     
    S
    K
    Call / Put
    A
    B = max (S - K, 0) for Call; max (K - S, 0) for Put
    A - B
    ACAD
    26.8
    25
    Call
                  3.20
    1.80
    1.40
    NFLX
    360.31
    380
    Put
                35.85
    19.69
    16.16
    PG
    98.97
    95
    Call
                  4.85
    3.97
    0.88
    IBM
    138.12
    137
    Put
                  2.19
    0.00
    2.19
    PSTG
    20.5
    22.5
    Call
                  1.05
    0.00
    1.05
    ZS
    49.68
    50
    Call
                 ...
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