Question

7. Explain to Desmond Clinton the difference between a call option and a put option.

Answer 1

If one would like to buy the stock if price increases beyond a certain level then he will buy call option which gives the right but not the obligation to buy the stock at a fixed price. So, one will gain when stock price increases.

However, if one would like to sell the stock if price decreases beyond a certain level then he will buy put option which gives the right but not the obligation to sell the stock at a fixed price. SO, one will gain when stock price decreases.