Options traded both on the exchange and in the over-the-counter market. Call option and put option. Now we will discuss the call option.

## Call option

Call option gives holder to right buy the underlying the price of an option to purchase one share is $5.The initial investment is $500.The **option** is European.

The investor can exercise only on the expiration date. If the **stock price **on this date is less than $60. The investor will clearly choose not to exercise. In these circumstances. The investor loses the whole of the initial investment of $500.If the** stock price** is above $60 on the expiration date the option exercised.

Suppose that the stock price is $75.By exercising the **option**, the investor is able to buy 100 shares for 60 per share. If the share sold immediately investor gain of $15 per share or $1500 ignoring transaction costs. When the initial cost of the** option **taken into account, the net profit to the investor is $1000.

Profit from buying a call option

### Put option

A **put option** gives the holder the right to sell the underlying asset by a certain date for certain price. The purchase of a** put option** is hoping that **stock price** will decrease.

An investor who buys a European put option to sell 100 shares with strike price of $90.Suppose that the current stock price is $85.Expiration date of the option is in three months and the price of **option** to sell one share is $7.

The initial investment is $700 Because the **option** is European.it will be exercised only if the **stock** **price** is below$90 at the expiration date. Suppose that the stock price is $75 on this date.

The investor can buy 100 share for $75 per share and under the term of the put option sell the same share for $90 to realize a gain of $15 per share or $1500.

When the $700 initial cost of the option is taken into account. The investor’s net profit is $800.There is no guarantee that the investor will make a gain. If the final **stock price** is above $90, the **put option** expires worthless, and the investor loses $700.

Profit from buying a put option

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