Managerial finance – In-depth analysis of concepts and differences between concepts
In Managerial Finance, the consequences of certain financial techniques, methods, and concepts are explored. The technical aspects of finance can be amalgamated with management studies so that the decision-making process goes smoothly. Investors can make buying or purchasing decisions based on market demand and supply.
Reasons for an investor behind purchasing an option instead of shares of the underlying stock
An investor would be interested in purchasing options rather than shares because options have a range of advantages. In case an underlying stock price reduces and results in put options’ strike price, the investor can easily buy the share available on strike price instead of purchasing the share by paying high prices (Black, 1975). The investor can make a choice regarding the types of put options to sell. The investor can also select the best strike price and can even control the price he/she will pay for a stock. Stock options have added advantages. The premium that the investor would receive in case of puts is likely to offer a small buffer between breakeven trade point and stock purchase price. It implies that the stock price is likely to get declined further so that money can be lost in the trade.
An analysis of the attractiveness of the price option to investors
The spot price of Apple is $296, and the 290 March PE strike price is $7.90. Then, 20th March 2020 is the expiry date. This price of the option is highly attractive because of the high degree of open interest and volume. Among a range of other options, it is the highest. At present, the negative market outlook, along with the stock performance of Apple Inc, is likely to have a negative impact. One of the reasons behind this is the ongoing Corona virus issue prevailing in China. The Chinese market is considered one of the Apple Inc.’s biggest markets, and therefore concerning issues might arise.
Differences between conventional options and LEAPS
LEAPS are the abbreviation for “Long Term Equity Anticipation Securities,” and it denotes to long-term options available for investors. The expiration dates usually ranges from nine months to one and a half year. In case of an expiration date below nine months, LEAPS gets converted to conventional options. A difference lies between conventional options and LEAPS because the European or American option is hardly traded in case of an exchange. A conventional option is tied between the parties, and after a negotiation phase, the parties agree to trade (Dempsey et al., 1996). It is one of the unique features of the conventional option. The LEAPS options are alternatively referred to as options contracts, and it tends to expire at least once during a year. Don't use plagiarised sources.Get your custom essay just from $11/page
The affordability of LEAPS is more in comparison to stocks simply because LEAPS are obtainable at “option contract prices.” Since the expiration date of LEAPS is high, the possibility of movement of the underlying prices of security is more. In comparison to traditional or conventional options, LEAPS erodes much slower. On the other hand, LEAPS can be costly in comparison to conventional options. The buyer is bound to pay a high premium (Lundstrum & Walker, 2006). It implies that LEAPS buyers invest more and more capital at the initial stages. Not all investors can afford it. Nevertheless, buyers are attracted to the tempting expiration period that conventional options do not provide. Without a plan or a strategic trading, it is impossible to afford that massive amount of capital. The contract size in the case of LEAPS is fixed. On the other hand, the contract size in the case of conventional options is subjected to change.
References
Black, F. (1975). Fact and fantasy in the use of options. Financial Analysts Journal, 31(4), 36-41.
Dempsey, M., Hudson, R., Littler, K., & Keasey, K. (1996). On the Risk of Stocks in the Long Run: a Resolution to the Debate?. Financial Analysts Journal, 52(5), 57-62.
Lundstrum, L. L., & Walker, M. D. (2006). LEAPS introductions and the value of the underlying stocks. Journal of Financial Intermediation, 15(4), 494-510.