Options-Hedge against risks or for speculation

Essay by stev_nemanjaUniversity, Bachelor'sA, November 2007

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A Finance II Home Assignment


Hedge against risks or for speculation

Table of contents

Options through history 3

Lang Call 3

Short Call 3

Long Put 4

Short Put 4

Option Strategies 5

Covered Call 5

Small Cap 5

Collar 6

Straddle 6

Strangle 6

Trading 8

Reference: 9


Options through history

Taking look through history we can see that there were very similar types of contracts used since ancient time. Even there are written proves about options purchases , for instance Aristotle had written about buying options in order to use olive presses during the coming harvest. Options have been used by real estate developers. Options as we know them today began trading at the Chicago Board of Trade (CBOT) in 1982 as financial futures. When Chicago Board of Trade was established in 1982, few observers guessed what kind of success it would be.

Since then, trading volume in these contracts has grown dramatically- placing them consistently on the lists of the most actively traded contracts in the world. They have become indispensable tools for risk management and speculative trading. Nowadays CEBOT trades options to buy or sell more than 30 billion shares of stock in 1 500 companies each year.

Call option is right to buy an asset at specified exercise price on or before the exercise date.

Put option is the right to set an asset at specified exercise price on or before the exercise date

The buyer of the option has the right but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time for a certain price (the strike price). There...