Re: answer me please..

On Apr 29, 6:42 am, diyaka...@xxxxxxxxx wrote:
Explain the economic importance of the options market, also please
evaluate one option valuation model..
diyaka...@xxxxxxxxx
with all my respict.
Perfect Light.


When used as they are intended, options serve as an insurance policy
to an investment in corporate stock. Stock options play the same role
in the economy as any insurance policy on any piece of property.

A "Put Option" is a contract that gives the holder a right to sell his
stock at a specific price, called the "Strike Price." If the market
price of the stock that he holds falls below the Strike Price, the
option holder can exercise his option and mitigate his loss.

The decision to not hold a position in a stock is every bit as much an
investment decision as the decision to buy. Someone who is interested
in owning stock but decides to wait might buy a Call Option to protect
himself from a rise in the stock price. If the price goes up beyond
the Strike Price, the Call Option allows that investor to buy at the
Strike Price thereby protecting him from a missed opportunity.

The market cost of an option is determined partly by how close the
Strike Price is to the current market price of the underlying stock.
Also, just as with any insurance policy, a stock option typically has
a term limit: the longer the term, the more expensive the option.

Thus, the stock option itself has a market price and can be bought and
sold by investors based on the above factors. So, stock options can be
traded on speculation without any underlying investment in the actual
stock. While this form of gambling might seem at first glance to have
no economic value, it serves the greater good by facilitating the free
availability of contracts for investors who wish to exercise them for
their original intent.


Steve Campbell
www.avicorcho.com

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