A "strangle" is an investment strategy where an investor buys both "call" and "put" options. Both of these options have identical maturity dates but the strike prices are different. These options are usually bought "out of money."Generally, the strike price of a call option is higher than the underlying stock’s price, whereas the strike price of a put option is lower than the underlying stock’s price. Strangle is a popular option when the investors realize that a large price movement will occur on their stock but they do not know the direction of the movement.In case the price of the ... Read More

Options are a type of derivative financial instrument between two parties who contractually agree to transact an asset at an agreed price before a future date. An "option" provides its owner the opportunity and right to either buy or sell the asset at the exercise price, but the owner is not bound to exercise (buy or sell) the option. If the option reaches its expiration date without being traded, it becomes useless without any value.Basically, two types of options are there in the market −Call options – Call options let the option holder buy an asset at a specified price ... Read More

"Opportunity cost" is a term that is used extensively in economics and finance. The uniqueness of the term lies in the fact that there is no mention of the opportunity cost of capital in the accounting books. It is not an "explicit cost"; so, there is no mention of this cost in the accounting records. Rather, it is an "implicit cost" that results out of the investment decisions.Alternate Uses of MoneyThe opportunity cost of capital represents various alternate uses of money. For example, if an investor has INR 1, 00, 000 to invest and he/she decides to invest it in ... Read More

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