Question

True or False

1.An option buyer exercises only if his profit is positive.

2.An option buyer will not exercise if doing so results in a loss (i.e. if her overall profit is negative).

3.A writer of a put option exercises if her payoff is positive.

4.American options are traded in the US, while European options are traded in Europe.

5.The sum of a call buyer’s profit and a call seller’s profit is always positive.

6.The sum of put buyer and seller’s payoff is never negative.

7.At the break-even price, both the call buyer's and the call seller’s payoffs are zero.

8.At the time when an investor purchases a put contract, the investor knows for certain what her payoff will be at expiration, but does not know what her profit will be at expiration.

Answer 1

1.False, he exercises when the strike price is favourable compared to market price

2.False

3.False, writer cannot exercise option

4.False, both options are traded everywhere

5.false, it is zero

6.true

7.false, profit is zero

8.false

Answer 2

1. True : An option buyer exercises only if his profit is positive

2. True: An option buyer will not exercise if doing so results in a loss (i.e. if her overall profit is negative).

3. False: A writer of a put option exercises if her payoff is positive.

4. False: .American options are traded in the US, while European options are traded in Europe.

5. False: The sum of a call buyer’s profit and a call seller’s profit is always positive.

6. True: The sum of put buyer and seller’s payoff is never negative.

7. True: At the break-even price, both the call buyer's and the call seller’s payoffs are zero.

8. True: At the time when an investor purchases a put contract, the investor knows for certain what her payoff will be at expiration, but does not know what her profit will be at expiration.

Option is a derivative which gives its holder a right but not the obligation to buy or sell underlying assets on expiration date at specific price.

There are two types of option :

1. Call option : Right to buy
2. Put option : Right to sell

An Investor can take one two position of option :

1. Long an option : Buy a option
2. Short an option : sell a option or write a option

The basic difference between these two position provided below:

	Long an option	Short an option
Type of Transaction	Buy	Sale
Investor is called :	Option holder	Option writer
Profit/Loss	Profit : Unlimited Loss : Limited to option price	Profit : Limited to option price Loss : Unlimited

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.