Finance Management Articles - Page 43 of 96

What is a Put Option?A put option is a contract that allows the option holder to sell a number of underlying securities at an agreed-upon price before a certain date. The price at which put option’s securities are sold is known as the "strike price."When the option is exercised, the writer or issuer of the option is obligated to buy the option at the strike price. Exercising means the owner of the option is using their right to sell the option to earn a profit from it according to the given norms while the option was formed.Note − The writer ... Read More

Call options can help in minimizing portfolio losses. A call option can be exercised at any point in time to earn a premium. Call option holders are not obligated to buy the options, but they can hold options they have as long as they want. So, is there any specific rule to check whether and when to exercise a call option? The answer is "yes", and it should not be hard to earn a premium if the exercise goes well.Check if the call option is in the moneyOne would simply never buy an option to get a loss in his ... Read More

Sharpe’s Model of Capital Asset Pricing Model results in the cost of equity estimation. Sharpe’s model calculates the cost of capital by building a relationship between risk and return. As per the model, a risk-free return is expected out of every investment. The expectation is greater than that is based on the given amount of risk associated with the chosen investment. The model states that the anticipated or required rate of return is equal to the sum of the risk-free rate and a certain premium dependent on the systematic risk associated with the security.Systematic Risk and Unsystematic RiskSystematic Risk is ... Read More

By the term financial leverage, we usually mean how much debt a firm has, or how ‘levered’ it is, in comparison to equity. This means also how much debt does a firm hold in its capital structure?Higher debt means high-interest payments and high-interest payments mean a lower profit. These high-interest payments and low profit mean higher risks for shareholders.What is actually the meaning of beta? Beta is a measure of risk a company holds. It lets us know how much riskier a particular firm is in comparison to an index, such as the S&P index. For example, if the beta ... Read More

Spread is an options trading strategy where a trader buys or sells multiple options of the same type (call or put) which have the same underlying asset but the expiration dates and strike prices or both may vary.Depending on the nature of options included, there are three types of spread strategies in the market. Here are the spreads of different types −Vertical spread strategyHorizontal spread strategyDiagonal spread strategyVertical Spread StrategyAlso called money spread, this strategy includes two options of the same expiry date but different strike prices. A vertical strategy is helpful in diminishing downside risk, but it also limits ... Read More

The "market model" shows how the forces of demand and supply correlate with each other to measure the prices and the quantities that are sold in the market. The market model is very important because many other models of finance are derived from it, such as the forex market and the market for loanable funds.Market Model – Graphical PresentationTwo axes − "Quantity" or "Q" labeled on the horizontal axis and "Price" or "P" on the vertical axis.Two curves − A demand curve labeled "D" sloping downward and a supply curve labeled "S" sloping upward.To show a change in supply or ... Read More

The capital asset pricing model (CAPM) asserts that the anticipated return of a security is related to its beta. Beta is a representation of the systematic risk, which cannot be eliminated simply by means of diversification.According to CAPM, the term ‘beta’ simply means the covariance of a security’s return while the return is obtained from the market portfolio. Dividing the covariance to the market variance standardizes the relationship between the anticipated return and accounting beta.Although the beta is estimated from CAPM, the model does not provide any information regarding the factors that affect beta. This particular issue of CAPM and ... Read More

Options are a great way to make money from short-term sales. However, one must be aware of the market and make a resilient strategy to gain profits from the options. There are definitely some risks while investing in options, but they can be minimized to a large extent. A "protective put" is a special version of the put option to let the investors earn profit without having to lose money too badly if the strategy goes wrong.What is a protective put?A protective put is an investment strategy that is designed to help an investor limit the losses in case of ... Read More

If the issuers of the underlying security of an option call early, the investors lose some money. A call premium is a compensation paid by the issuers to make up for the gap or loss suffered by the option holders. The premium is meant to balance the risk option owners face while the underlying is exercised earlier than its maturity period.Call Premium – What is it?Some securities, such as bonds have the luxury to be called early. If such securities are kept as the underlying in an option, they may be called earlier than the deadline of the security. This ... Read More

A covered call is an options strategy for which one needs to hold a long position in the underlying asset, such as a stock while selling the call option on the underlying asset. By selling the call option, the investor generally locks the price in of the asset, to enjoy a short-term profit. Moreover, the investor also gets a slight cushioning from a future decline in stock prices.When should you use the covered call option strategy?The covered call works well when the market is neutral or moderately bullish. In such circumstances, the future upside potential of the stock is limited. ... Read More