Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 16: Problem 3

Why might a person buy a call option?

Short Answer

Expert verified
A person might buy a call option for speculation, to take advantage of the leverage offered by options, or as a form of protection or insurance against potential losses.

Step by step solution

01

Reason 1: Speculation

A person might buy a call option for speculation. If they believe that the price of a stock is going to rise, they could buy a call option to potentially profit from this upward movement without needing to actually buy the underlying stock.
02

Reason 2: Leverage

A call option also offers leverage, which means greater potential profit or loss per unit of capital invested. Since options contracts are typically much cheaper than the underlying stocks, an individual can control the same amount of shares with less money upfront, offering a chance for higher percentage returns.
03

Reason 3: Protection or Insurance

Call options can be used for hedging purposes. If a person owns shares of a stock and they're afraid the price might drop, they could buy a call option at a higher strike price as a form of insurance. If the price of the stock does indeed fall, they could exercise the call option and sell at the higher strike price, thus offsetting their losses.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The currency speculator who sells futures contracts assumes the risk that someone else doesn't want to assume" Do you agree or disagree? Explain your answer.

If the face value of a bond is \(\$ 10,000\) and the annual coupon payment is \(\$ 600\) then what is the coupon rate?

"If you can predict interest rates, then you can earn a fortune buying and selling bonds." Do you agree or disagree? Explain your answer.

Define: a. investment bank b. dividend

Why might a person buy a futures contract?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free