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Hi John,
In the notes it says, “…company intends to sell shares in 6 months….worried price could fall…sell some call options now”
Firstly, would you not buy a put option so you could sell at a fixed price in the future.
Secondly, if you sell a call, does the person you sell it to not have the choice whether to exercise it or not (eg as when you buy a call).Thanks for any help,
MichaelYes – you could certainly buy a put option. (Although I do explain in my free lectures why a delta hedge would normally be selling call options, and in the exam we sell call options except when the question specifically says to buy put options.
By selling a call, you are not being the ‘dealer’ you will sell the call at whatever the price is today and then buy back the call at whatever the price is in 6 months time. So if the share price has fallen (and therefore there is a loss), then the price of a call option will also have fallen and you will make a compensating profit,
So if you buy a call option, you pay a premium/deposit and choose whether you wish to convert in future or not.
Is it the same for selling a call option? Pay a premium then have a choice in future?
I have watched the lectures and felt I understood this last week, but I seem completely confused going over it again now.
Thanks,
MichaelIt is really neither!
If you buy a call option then you buy at whatever todays price is, and then sell at whatever the price is on the date you sell it.
If you sell a call option, then you sell at whatever todays price is, and then buy at whatever the price is on the date you buy it.
Hi John,
Is the following correct:
Buy Call Option: I don’t own any shares, I buy an option for say 15c with an exercise price of $1.80 in 3months (eg Ch 13 example 1). If the share price in 3 months is greater than $1.80 then I exercise the option and buy the share for $1.80 and can immediately sell it for a profit. If the share price is less than $1.80 I do not exercise the option (it expires/I throw it away).
Buy Put Option: I own a share currently worth $2.90 (eg example 3) which I am going to sell in 6 months. I buy a put option for 14c which guarantees me a price of $2.60. In 6 months time if the share value is less than $2.60, I exercise the option and sell my share at $2.60. If the share price is higher than $2.60, I sell for the price on that day and do not exercise my option.
Sell Call Option: I own shares, I am worried the value might fall, so I sell call options today, buy them back in the future. If share price falls, I will net off my profit from call options. If share price rises, I will make a loss in the options and will net off to same result overall.
Can you sell a Put Option? If so, what would be the scenario to do this?
Sorry for such a long question. Your help is very much appreciated.
Thanks,
MichaelWhat you have written in the first three paragraphs is correct.
For the last bit – yes, you can sell a put option, but you must then buy it back later. If the share price falls, the value if the put options increases and you buy them back at a profit which nets off against the loss on the shares.
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