Question

A Finance professor you know makes the following statement: The payoffs to call and put options...

A Finance professor you know makes the following statement: The payoffs to call and put options depend on the stock price. If an investor expects the stock price to increase, he or she can trade options to make a tidy profit.

i. What trades should the investor place in calls? In puts? Explain.

ii. How do you react to the professor’s statement?

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Answer #1

i. When Investor are expecting that the stock market is/will be bullish and stock of share price is/ will be incresed in future then they will take a position in call option by paying a premuim, to earn unlimited profit. On the other side, if investor are  expecting that the stock market is/will be bearish and stock of share price is/ will be decreased in future they will take a position in put option by paying a premuim, to earn unlimited profit.

ii. Professor's statment is correct that payoff to call and put options depend on the stock price and as above stated, if an investor espect the stock price to increase, he or she can trade options ( Call Option) to make a tidy profit.

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