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Choose the correct code for the following statements being correct or incorrect. Statement I: An option which gives its holder the privilege of selling to other party a fixed amount of some stock at a stated price on or before a predetermined date is known as call option. Statement II : In an option, the holder has the privilege of purchasing from other party a fixed amount of some stock at a stated price on or before a predetermined date is known as put option. 

Choose the correct code for the following statements being correct or incorrect. Statement I: An option which gives its holder the privilege of selling to other party a fixed amount of some stock at a stated price on or before a predetermined date is known as call option. Statement II : In an option, the holder has the privilege of purchasing from other party a fixed amount of some stock at a stated price on or before a predetermined date is known as put option.  Correct Answer Both the statement I and II are incorrect.

Call options & put options.

  1. These are Derivative instruments that mean their price movements are based on price movements of another product called 'underlying' assets.
  2. In Derivative Trading, the buying and selling of shares are done at a specific price ascertained in the future. On this basis there are two predominant types of options available namely - Call options & put options.
  3. Options are contracts in derivative investments that give the buyer the right t buy or sell the underlying asset or the security on the basis of which derivative contract is made by a set expiration date at a specific price. The specific price is called the strike price. It refers to the amount at which a derivative contract can be done either to purchase or sell.

1. Call Option: It is a contract that gives the buyer the right and obligation to buy the underlying asset at the strike price at any time up to the expiration date.Example - A stock call option with a strike price of 20 means the option buyer can use the option to buy that stock at $20 before the option expires.

Therefore, the statement I is incorrect.

2. Put Option: It is a contract that gives the buyer the right to sell the underlying asset at a strike price at any time up to the expiration date.Example - A Stock Put option with a strike price of 20 signifies the put option buyer can use the option to sell that stock at $20 before the option expires.

Therefore, statement II is incorrect.

  • Call Option is purchased if the trader expects the price of the underlying asset to increase within a certain time frame.
  • Put Option is bought if the trader anticipates the price of the underlying asset to fall drastically within a certain time frame.
  • The strike price is the set price that a put or call option can be purchased or sold.
  • Both the options represent 100 shares of the underlying stock.

Related Questions

Which of the following statements are correct?
1. A put option is said to bein the money or favourable for the option holder when the strike price is higher than the spot price.
2. A put option is said to be out of money when the strike price is lower than the market price.
3. Fir an option writer the maximum gain is the amount of premium received by the put option holder.
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