A Note on Investment Strategies Involving Options

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Case Details:

Case Code : MISC003
Case Length : 11 Pages
Period : 1973 - 2003
Pub Date : 2003
Teaching Note : Available
Organization : -
Industry : Banking & Financial Services
Countries : -

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Defining the Terms

An option is the right, but not an obligation, to buy or sell a specific commodity on or before a specific date for a specific amount. Options are of two basic types - Call and Put. A call option gives the option holder the right, but not an obligation, to buy a given amount of an underlying asset on or before a certain date for a specified price...

Investment Strategies Involving Options

Let us consider a typical option transaction. On April 1, 2002, a person A sells a three-month Rs. 500 European call option on shares of Britannia, which is currently trading at Rs. 470 to B for a price of Rs.3.25. Now B has the right to approach A on July 01, 2002 and buy one share of Britannia at Rs.500. In the transaction, Rs 3.25 is the 'option premium,' Rs.500 is the 'exercise price' and July 01, 2002 is the 'expiration date.'

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Conclusion

This concept note deals in detail with the important investment strategies using options and explains how an investor can make profits not only from a rise in stock prices but also when the prices fall. If used judiciously, options can prove to be useful tools to hedge positions in shares...

Exhibit

Exhibit I

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