AFMHow to choose exercise price for put/call options?

I have lot of questions on this part as well.....

I have lot of questions on this part as well.....

Hi,
For call option, you are saving therefore interest/ exchange is in form of receiving therefore strike price will be a positive number & premium is what you paying out therefore its a negative number which will be subtracted to get the net receiving.
For put option, you are borrowing therefore strike price will be negative (as you paying out), premium is also negative therefore both is added on to get to net payable.

Hope this help

Hi... For both call and Put options the premium is deducted as it is a cost to the purchaser of the option.Therefore whether the option is exercised or not the premium is deducted.

Therefore whether it is a call or put.. the premium is deducted

Okay, here is how to remember this...go with the concepts.

When you are buying CALL options, you are buying a RIGHT to buy. Right? =p
Should you choose to exercise this right, you will have to make an outflow of exercise price (you will be buying the commodity at your exercise price whereas the actual spot at that time would be higher than the exercise price, giving you an advantage). However, this is not the only outflow from your part; you have already paid a premium to purchase this option therefore in the case where you do exercise the option, your total outflow would equate to exercise price + premium already paid.
Obviously, you, as the company would hate paying more, and would look to buy an option which would allow you the minimum outflow. Therefore, add the exercise prices and premiums of all the options and compare. Then choose the lowest one..

For put options, you are buying a right to sell... so when you actually exercise your call option, you will end up receiving money. For example, you bought a put option with an exercise price of 1.50 CU. The spot went down to, say, 1.40 CU on a later date. Now, if you were transacting at spot, you would have to sell the commodity you are holding at 1.40CU, but thanks to the put options you have, you can sell the same commodity at 1.50CU resulting in an inflow of 1.50CU. However, this will not be your only cashflow. Remember you paid a premium in order to buy this option in the first place, in this case, let it be 0.08CU. So, essentially, you are receiving 1.50CU at one hand, but on the other hand you are also paying 0.08CU, meaning in net, you are only receiving 1.42 CU (1.50 - 0.08).

Again, its rather obvious that you, as the company, would love to gain as much as you can, hence you will calculate the net put values of all the put options as shown above, and choose the one which gives you the highest receipt

Now about the question your teacher did @nikitasia, was your company selling a put option by any chance? In such a case, you would add the premium as you would be receiving the premium from the purchaser but in the case where the buyer exercises the option, your exercise price will become your cash outflow.