Question

2. Analyze how investors can make (or lose) money from put and call options by creating an exposure and hedging it with those tools (quantify).

Answer 1

Investors can make or lose money by using different kinds of put options and call options separately or with each other to make different combinations.

a call option is always used to reflect right of buying a share and put option is always indicating the right to sale a certain amount of share so I would example it through this illustration-

I am using a covered call which means that the investor is holding the share in his portfolio and he is trying to sell the same share in the futures and options in order to to gain from rangebound movement of the shares as he is expecting that the share is not going to go upwards in the current short term but he will be bullish on the share in the long term.

Investor has bought 100 units of Apple at $80 and he has also sold a call option of $85 for a premium of $2 and if the current market price of the share on the date of expiry would be $82, the investor would be gaining all of the premium amount on his sale of the call option and he will also gain through the increase in the underlying assets held in his portfolio.

So his overall gain would be=[$2+ $2]= $4*100= $400