Question

1. conceptually, a call option is a small payment (called option premium) to secure a certain price for an asset at a certain date. When that date comes, you can either purchase the asset for that certain price or just walk away. There is no obligation. All options contracts are specified by the expiration date, premium paid, strike price, and the direction (call or put). A call option is a bet on price increase and a put option is a bet on a price decrease.
2. Buying a house has often being compared to buying a call option. While not exactly similar, there are quite a few similarities. Consider a 20% down payment on a $250,000 house purchased through a 30-year fixed rate mortgage. Is it more like a call option or like a put option? What would be the strike price in this case? What is the premium? What is the expiration date?

Answer 1

It is more like a call option. This is because by making the down payment (premium), the purchase price of the house (strike price) is locked in. Even if the house price increases in the future, you can purchase the house at $250,000 by making the loan payments. However, the house can only be owned after 30 years (expiration date) when the loan payments are completed.

Therefore, in this case :

strike price = cost of house = $250,000

premium = down payment = $250,000 * 20% = $50,000

expiration date = date of completion of mortgage payments = 30 years from today