Essay on Investing in Options for Apple

Options provide their buyers with the right to either buy or sell the underlying stock at a predefined price. Options are either put or call (Hull, 2018). Firstly, I would invest in Apple’s call options if I expect the price of the underlying stock to go high before the expiry date. As a result, I will generate profits by exercising the option to sell Apple’s stock at a price that is higher than the strike price (Hull, 2018; Hull & White, 2018). However, I am cognizant that this rarely happens. Therefore, I will invest in Apple’s call options if I believe that the commodity market will go higher, and I would profit in that move.

Similarly, I would invest in Apple’s put options if I expect the price of the underlying stock to go down before the expiry date. Because of this, I will be able to generate profits by exercising the option to buy Apple’s stock at a price that is below the strike price and then sell it in the open market at a comparatively higher price (Hull, 2018; Hull & White, 2018). Similarly, I can make a profit with the put options when the option price increases.

Additionally, when investing in the put options, I will have to consider volatility, time value and whether the contract is either in the money or not. For put options, their time value is principally the likelihood that the price of the underlying stock will fall below the strike price before the expiry date of the particular contract (Trigeorgis & Reuer, 2017). Essentially, this means that a put option increasingly becomes less valuable as it approaches the expiry date. If, after detailed analysis, I determine that there is a high likelihood that the price of Apple’s underlying stock will fall below the expiry date of the given contract, then I will invest in Apple’s put options.

Besides, the time value of Apple’s put options, I will also have to consider the volatility of the underlying security. Arguably, this is because the volatility of the underlying security greatly affects the price of the put option. Volatility is not always a good thing in the standard stock market when one has a long stock position. Nonetheless, it is imperative to note that the higher the volatility of a specific put option, the more expensive it is (Trigeorgis & Reuer, 2017). This can be partly attributed to the fact that the put option bets on the price of the underlying stock to oscillate in a given period.

Additionally, I will have to consider whether Apple’s put options are in the money or not before I can invest. Undoubtedly, I will invest in Apple’s put options if they are in the money. A put option is considered to be in the money in the event where its strike price is higher than the price of the underlying stock. Options that are in the money are usually expensive since they are considered to be immediately in the profit (Blanque et al.,2017). Principally, this means that one can exercise a put option that is in the money immediately and earn a proft since he/she can sell the shares of the put option and make a profit (Blanque et al.,2017). Howeer, if I am highly certain that the price of the underlying stock will fall below the expiry date, I can invest in out of the money put options.

References

Blanqué, P., De Jong, M., & Ithurbide, P. (2016). Appraising investment risk.

Hull, J. C. (2018). Options, Futures, and Other Derivatives, 10e. Aufl., New York.

Hull, J., & White, A. (2018). Interest rate trees: extensions and applications. Quantitative Finance, 18(7), 1199-1209.

Trigeorgis, L., & Reuer, J. J. (2017). Real options theory in strategic management. Strategic Management Journal, 38(1), 42-63.