Call/Put Options

Call Options

            A call option is an investment agreement that gives a prospective investor the exclusive right to purchase a certain stock, a particular bond, or a specified commodity, at a predetermined price in a given duration of time period (Weert p.3). It is worth noting that call options give the investor a right to buy and not an obligation to do the same. The asset in questions may also be a financial instrument besides the ones mentioned above. An investor, therefore, exercises the option to call in or buy the agreed asset where the funds they have invested are likely to make a profitable return. This normally happens when the market price of the underlying asset shoots up or increases in value.

Call options are a popular form of investment because investors use them to leverage on their portfolio by boosting their investment options with as minimal risk as possible. The risk of borrowing funds to invest in the asset are greatly reduced. The profit returns on the calls are also magnified from the initial amount invested.

Put Options

A put option is an investment contract agreement that accords the owner the right to dispose of a given financial instrument or asset at a predetermined price within a stipulated period of time. It differs from a call option in that it gives the holder the right, and not any obligation, to sell their underlying asset (Weert p.5).

Speaking in terms of investment, a put option becomes profitable to the investor whenever the price of the asset in question declines in value in relation to the strike price agreed in the options contract. The decreased price allows the investor to purchase more of the asset and then resell them at an inflated price that was agreed upon, thus thrusting the investor into a profitable return.

Works Cited

Weert, Frans. Exotic Options Trading. Hoboken, N.J: Wiley, 2013. Internet resource.