Finance Research paper

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Call and Put Options in Finance
Call and put options are derived from the fluctuating prices of a commodity in the economy. A trader may decide to buy a call option when they expect the prices to rise within an expected time. A put option, on the other hand, is bought when a trader expects the price of the commodity to fall after an expected period of time. Let us take an example of a call option on the shares of a company A. It has a strike price of $100 and is to expire on 16 April. It is important to take note that the expiration date is always on the third Friday of the scheduled expiration month. The option contracts dictate to the seller and buyer the rules of engagement in the transactions (Jongadsayakul 106-110). Let us say the buyer buys 100 shares at a price of $2 dollars per contract. With the call option, a buyer can purchase the shares at $100 and trade them right away at $105. This is called in-the-money. Due to this transaction, the shares will sell at $105 on the expiry date instead of $100. Each option in the transaction represents 100 shares which amount to $500. This option yields a whopping $300 profit to the buyer. However, if the option expires, company A will trade below $100, and the co tac expires out of money. In events such as Forex Exchange, the call option is applied when on has conducted a good study of the trend. The wrong call option can result in big losses. As a trader, I would prefer always to keep tabs on the market conditions to take advantage of the trade.

A put option involves a buyer who buys a commodity when he/she thinks it is safe. It is the option given to a trader to sell shares at a certain price and by a given date. When a trader believes that a given stoke is going to fall. It gives the buyer a short ultimatum to make a decision. Let us say company B has shares that are high-priced at $700 per share and a buyer believes that the stock is going to drop (Jongadsayakul 106-110). He/she decides a price and an expiry date of which they expect the stock to drop. The right put option can help the buyer to realize good profits. For example, buying shares close to the expiration month of company B is cheap. After the sales reports are released and are declared to have been terrible, the buyer gains profits. This applies to forex exchange too. Knowing when to buy is crucial.
Expiration Time
The expiration dates of the contacts are important deadlines to beat. The expiration change has been difficult to understand until the intervention of the Chicago Board Options Exchange (CBOE). Any buyer needs to use a comfortable expiration time (Frino and McKenzie 451-469). It can range from a few days to a year. A long-term equity anticipation security was introduced to enable the existence of trade cycles. Having a long expiration like say a year only makes the trading more complex. However, it is not necessary to memorize the expiration periods.
Deep in the Money Call and Put Options
Let us take the example of a company C with an exercise price of $40. A buyer thinks that the stock price may go up to $50 in future. A buyer who decides to buy the shares at the $40 price, and in a few weeks the stock price goes up to $52, it is considered that as deep in the money call option. In the same way, if a buyer has $55 put in the company, it is considered as deep in the money if the company stock is selling at $40. There is always an advantage in buying deep in the money puts and calls.
Deep out of the Money call and Put Options
Deep out of the money refers to the financial state where the strike price is less or greater than the trading price at the present. If a company D has a stock value of $35 and all call options and the strike price goes up to $38. This means that the company is out of money. A call option that allows a buyer to the sock at say $40 means that the company will be $5 out of money.
Works Cited
Frino, Alex, and Michael D. McKenzie. “The Pricing Of Stock Index Futures Spreads At Contract Expiration.” Journal of Futures Markets 22.5 (2002): 451-469. Web.Jongadsayakul, Woradee. “Call & Put Butterfly Spreads Test Of SET50 Index Options Market Efficiency And SET50 Index Options Contract Adjustment.” International Journal of Trade, Economics, and Finance 9.3 (2018): 106-110. Web.