Theoretically, an investor can from portfolio of options with any assets. In practice, stock options are most popular investor business daily. A share, a put and a call can be combined together to create several pay off opportunities. Some of these combinations have significant implications.
Investor Business Daily
A long position involves buying and holding shares or any other assets to benefit from capital gains and dividend. An investor may create a long position in the shares of a firm. A long position investor business daily strategy is risky. The investor will incur loss if the share price declines. An investor will gain if the share price rises in the future. However, he will incur loss if the price in future turns out to be lower than the current price. An investor can however, guard himself against the risk of loss in the share value by purchasing a put option that has the exercise price equal to the current market price of the share investment companies
Combination of share and a put option
Put option at the money is called a protective put. The combination of a long position in the share and a protective put helps to avoid the investors risk when the share price falls. If the price of the share increases, the investor gains and the value of his portfolio at expiration will be equal to the share price.
Combining Call and Put Options at the Same Exercise Price
Combinations of Put Options, Call Options, and Share Options
Suppose Company Y is considering the acquisition of Company X. It has offered to buy 20 percent of Company X shares. The price of Company X share has started increasing. The price could decline substantially if Company Y attempt fails. How could you take advantages of rising prices and at the same time avoid the risk if the price falls? You can do so by simultaneously purchasing both put and call options at the same exercise price.A company Y is a combined position created by the simultaneous purchase or sale of a put and a call with the same expiration date and the same exercise price.
Suppose the exercise price is 105$ for both put and call options. What will be your pay off if the price of Company X share increases to 120$ in three months? You will forgo put option, but you will exercise call option. So your pay off will be the excess of the share price over the call exercise price 120$-105$=15$.
On the contrary, suppose that the acquisition attempt fails and Company X share price falls to 95$ in three months. In this situation, you will exercise put options and let the call option lapse. Your pay off will be the excess of exercise price over the share price 105$-95$=10$. Thus, when you invest in a Company Y, you will benefit whether the price of the share falls or rises.
What will be the position of the seller of a investor business daily? He will lose whether the price of the share increases or decreases. But the seller of a Company Y will collect put and call premium. Thus, his lose will be reduced or his net pay off may be even positive.…