BENEFITS AND DRAWBACKS OF OPTIONS

[abhishreshthaa]

BENEFITS OF OPTIONS

Hedge instrument.


Limited risk
( for the buyer)


Cheaper alternative to buying the stock.

Speculation & Arbitrage


DRAWBACKS - OPTIONS

Price: Price of the option has to move over the acquisition cost. In the previous example, to break even the share price must increase by 11.


So, if the share price increases by Rs 5, an ordinary share would have a return of Rs 5 on investment. While the call option would still yield a loss.


Time: Options have a time limit imposed on them. If you do not 'exercise' the option within this time it is wasted and the cost of that option is lost.


If you are confident that the share price will rise it is better to buy the ordinary share

 

[rosemarry2]

BENEFITS OF OPTIONS

Hedge instrument.


Limited risk
( for the buyer)


Cheaper alternative to buying the stock.

Speculation & Arbitrage


DRAWBACKS - OPTIONS

Price: Price of the option has to move over the acquisition cost. In the previous example, to break even the share price must increase by 11.


So, if the share price increases by Rs 5, an ordinary share would have a return of Rs 5 on investment. While the call option would still yield a loss.


Time: Options have a time limit imposed on them. If you do not 'exercise' the option within this time it is wasted and the cost of that option is lost.


If you are confident that the share price will rise it is better to buy the ordinary share

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