Question

Create a scenario in which an investor would benefit from using option contracts to minimize risk.

Evaluate how models used for valuing stock options can be adapted to other underlying assets such as stock indexes. Reply QuotE

Answer 1

1.Investor can gain from using of the option contract by entering into covered call option when he believes that the stock is not going to go outside and he will sell the call option of the company so we will gain on the range bound movement of the company.

Let's say an investor has sold the call option of the company which is currently trading at 80 for strike price of 90. He is also holding the stock so that any upward movement in the stock would be hedged by his holding position.

The stock will expire at 81, and the investor will still gain on his position because he will eat the premium and the call will expire, and he will also gain on the static movement through underlying assets, he is holding the portfolio.