Question

Why someone says that put options have a high negative discount rate since they have a high negative systematic risk, and call options have a high positive discount rate since they have a high positive systematic risk

Answer 1

Options – Options provide rights but not obligation.

Put option: - Put option provide right to owner that he/she can sell an asset at specified date on specified rate/price. Put option exercised when prices of the underlying asset goes below the option price. This option availed when there is prediction that prices of a stock may go down.

Call Option: - Put option provide right to owner that he/she can buy an asset at specified date on specified rate/price. Call option exercised when prices of the underlying asset goes above the option price. This option availed when there is prediction that prices of a stock may go up.

Discount rate: - Discount rate provides value of money with time. If someone has option to receive money today or one year later definitely he would choose first option because he can use it for next one year. This denotes that same money today and one year later have two different values. This difference called discount rate.

Systematic risk: – Often known as Market Risk. Risk which is inherent with market, affect all investor of the market.

When someone own put option that denotes that there are negative sentiments or volatility in the stock. Therefore it can be said that put option have negative have a high negative discount rate since they have negative systematic risk and Call option have a high positive discount rate since they have positive systematic risk.