Investments: Analysis and Management, 12th Edition

chapter 19

Options

Having heard about options from several sources, you decide this is one of those topics that you at least have to be able to talk about. If you are going to manage your inheritance without interference, you don't want to be left standing there looking foolish when someone asks you about writing calls or buying a put to protect against market declines. Even the popular press talks about calls and puts on a regular basis. Therefore, you see no alternative but to plow ahead and learn enough about derivatives in general, and options in particular, to let you hold your own. And, besides, this may turn out to be very valuable information you can use in the future when investing.

Derivatives are contracts between two parties, a buyer and a seller, that have a price and trade in specific markets. Note that derivative contracts are simply agreements to transfer ownership of the asset involved under specified conditions.

The importance of derivative securities lies in the flexibility they provide investors in managing investment risk. Derivative instruments can also be used to speculate in various markets. This chapter analyzes one of these derivative contracts, options, while Chapter 20 analyzes another, futures.

AFTER READING THIS CHAPTER YOU WILL BE ABLE TO:

• Understand why investors use options in their investment strategies.
• Describe the option alternatives available to investors and how the options markets operate.
• Analyze basic option strategies.
• Understand the ...