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

The classification of a security risk into "diversifiable" and "non-diversifiable" risks has come up from the portfolio approach of capital investment. It has culminated in the well-known and popular Capital Asset Pricing Model (CAPM), developed by Sharpe, Lintner, and others. According to this framework, the "diversifiable risk" is the risk that can be eliminated by diversification, while "non-diversifiable risks" are the risks that cannot be diversified away. Many investors define the two types of risks as two complementary components of the standard deviation (SD) of a security's rate of return.Diversifiable RiskDiversifiable risk is also called as "unsystematic risk". These risks ... Read More

If you create a contract and then file for bankruptcy, then the lender or creditor can file a "contingent claim" against your estate. A contingent claim that is based on some future event can be dealt with by the court in a number of ways.Certain Conditions Must be MetFor the contingent claim to file, some certain events must have taken place in the preceding phases. Because the future event is not guaranteed to happen or the creditors cannot say with 100% condition that the bankruptcy will take place, the claim may or may not become valid.Contingent claims are usually filed ... Read More

Options are "derivative investments", meaning the price movements of the investments are based on the price movements of another financial product. The financial product from which the derivative is obtained is called the "underlying."Call and Put OptionsOptions are contracts that provide the buyer the right to buy or sell an underlying asset, at a predetermined price and before a specific date.A call option is bought by a trader if the investor expects the price of the underlying to rise within a certain time frame.A put option is bought by a trader if he/she expects the price of the underlying to ... Read More

What is a Strike Price?In the case of an option contract, the "strike price" is the predetermined and agreed-upon price at which a specific security may be bought (by the call option holder) or sold (by the put option holder) until or upon the expiration of the contract. The term "strike price" is also termed as "exercise price."Options are derivatives that offer their buyers a right, or an option—but not an obligation—to buy or sell a security, such as a stock at a specific price (or the strike price) until or on a certain date (the expiration date).Buying or selling ... Read More

The security market line (SML) is a graph that is drawn with the values obtained from the capital asset pricing model (CAPM). It is a theoretical presentation of expected returns of assets that are based on systematic risk.Non-diversifiable risk is not represented by the SML. In a broader sense, the SML shows the expected market returns at a given level of market risk for marketable security. The overall level of risk is measured by the beta of the security against the market level of risk.Security Market Line AssumptionsSince the security market line is a representation of the CAPM, the assumptions ... Read More

In simple words, both correlation and covariance show the relationship and the dependency between two variables.Covariance shows the direction of the path of the linear relationship between the variables while a function is applied to them.Correlation on the contrary measures both the power and direction of the linear relationship between two variables.In simple terms, correlation is a function of the covariance. The fact that differentiates the two is that covariance values are not standardized while correlation values are. The correlation coefficient of two variables can be obtained by dividing the covariance values of these variables by the multiplication of the ... Read More

In a study done to link the variance with returns, it was found that both genres of portfolio construction measures – minimum volatility and low volatility – deliver market return more than the average. Their information ratios (IRs) also are not statistically significant. It was also found that both strategies let investors assume palpable risk, in relation to the market prices, for which investors were not compensated.Minimum Variance Portfolio (MVP)The concept of Modern Portfolio Theory (MPT) has been the milestone for finance professionals for portfolio construction since Harry Markowitz introduced the idea into finance in 1952. Every finance student has ... Read More