Options can be used for speculation. If you believe that the spot price of T-bills is going to be much higher by next June, which of the following would be the best way to act on this belief? For simplicity, assume that the strike price and the spot price are about equal.
A)You could sell a put option
B)You could buy a put option.
C)You could buy a call option.
D)You could sell a call option.

Question

Quizplus · Accepted Answer

If you believe that the spot price of T-bills is going to be much higher by next June, the best choice would be to buy a call option. This would give you the right, but not the obligation, to buy T-bills at the strike price, which is the current market price. This means that you would be able to profit from the increase in the spot price of T-bills without having to actually purchase them outright. Selling a put option (choice A) or buying a put option (choice B) would only be profitable if the spot price of T-bills decreases, which is not consistent with your belief. Selling a call option (choice D) would obligate you to sell T-bills at the strike price if the spot price increases, which would result in a loss.

Options Can Be Used for Speculation