Abstract
Options are considered risky for investors and speculators due to fluctuation in the direction of price movements. An investor has to face the risk of profits where it may be extremely high or loss, here investors fail in choosing profitable options. The study is made to minimize the risk of investors by using straps option combination strategy in choosing profitable investment strategy and to know how the option combination strategy would be profitable when market moves up or down. The study has considered the securities of both increasing and decreasing prices, so that it would be possible to give suggestions for investors that how in both cases they can make profits.
Highlights
Spreads involve taking positions in call or put options only
In options market when an investor sign a contract, on the expiration date if the option signed is a call option, he will exercise the contract if the current market price of the underlying asset is more than the strike price of the contract and he will make profits and if the current market price of the underlying asset is less than the strike price he will not exercise the contract and he will make losses
On the expiration date if the option signed is a put option, he will exercise the contract if the current market price of the underlying asset is less than the strike price of the contract and he will make profits and if the current market price of the underlying asset is more than the strike price he will exercise the contract and he will incur losses
Summary
Spreads involve taking positions in call or put options only. Combinations represent option trading strategies which involve taking position in both calls and puts on the same stock. On the expiration date if the option signed is a put option, he will exercise the contract if the current market price of the underlying asset is less than the strike price of the contract and he will make profits and if the current market price of the underlying asset is more than the strike price he will exercise the contract and he will incur losses In both the cases the profit and losses are unlimited and this is the high risk factor for any investor and he cannot forecast whether he will make profits or loss. The benefit illustration for the investor is made by assuming the future market price of the securities on the expiration date and the price of the options are taken on the day when the contract is signed that is the first day of three month time period
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