Exam questions Essay Example | Topics and Well Written Essays - 500 words

Exam questions - Essay Example If the right is bought, it is called a long call; if the right is sold, it is called a short call. An option that gives the right in due course make a sale at a predetermined price is called a "put" option. If the right is bought, it is called a long put; if the right is sold, it is called a short put. i) Flexibility - Options are an extremely flexible tool. Options can be bought or sold in many different combinations for many different investment opportunities (i.e. Stocks, indices) . This allows for an investor to take advantage of varied market conditions available at a time. Options can be traded to address rising or declining markets, quiet markets or volatile markets with uncertain price directions. ii) Increased trading opportunities – There are a great number of strategies that can be adopted while trading options. These create additional profit and risk management opportunities for traders thus an increase in returns. iii) Limited risk with unlimited profits – If one buys a call option, they benefit from unlimited profit potential as the stock moves higher while the investor who buys a put option, has the benefit of unlimited profit potential as the stock moves lower. Index options are financial derivatives that give the possessor the right, but not the obligation, to buy or sell a basket of stocks, such as the Nasdaq – 100 index options, at an agreed-upon price and before a certain date. An index option is comparable to other options contracts, the difference being the underlying instruments are indexes. One may use index options to hedge when there is need to protect the value of the portfolio of mixed stocks in case of a market decline. Index puts are utilised in this instance. Index puts are generally used to protect unrealised profits stemming from an investor’s portfolio. There may be various classes of options that are available