You believe the price of an asset is going to increase within the next three months. Which one of the following payoff profiles for an option on that asset will reflect a profit if your belief is correct?
A) Buying a put
B) Selling a call
C) Buying a call
D) Selling a put
E) Selling both a call and a put

Question

Quizplus · Accepted Answer

Buying a call option gives the holder the right, but not the obligation, to buy the underlying asset at a certain price (strike price) within a certain time frame. If the price of the asset increases as anticipated, the holder of the call option can exercise the option and buy the asset at the lower strike price, then sell it at the higher market price to realize a profit. Selling a call option, buying a put option, and selling a put option all have payoff structures that result in losses if the price of the underlying asset increases within the next three months. Selling both a call and a put option results in a limited profit with unlimited risk, but is not the best choice for a bullish outlook.

You Believe the Price of an Asset Is Going to Increase