Call on a Put
What Is a Call on a Put?
A call on a put alludes to a trading setup where there is a call option on an underlying put option, and it is one of the four types of compound options. In the event that the option owner exercises the call option, they receive a put option, which is an option that gives the owner the right yet not the obligation to sell a specific asset at a set price inside a defined time span.
The value of a call on a put changes in inverse extent to the stock price. This implies the value diminishes as the stock price endlessly increments as the stock price diminishes. A call on a put is otherwise called a parted expense option.
Figuring out a Call on a Put
A call on a put will have two strike prices and two expiration dates, one for the call option and the other for the underlying put option. Additionally, there are two option premiums involved. The initial premium is paid front and center for the call option, and the extra premium is possibly paid assuming the call option is exercised and the option owner receives the put option. The premium, in this case, would generally be higher than if the option owner had just purchased the underlying put option, regardless.
Two calls and a put or two puts and a call are alluded to as a seagull option.
Illustration of a Call on a Put
Think about a U.S. company that is bidding on a contract for an European project. On the off chance that the company's bid is fruitful, it will receive 10 million euros upon project completion in one year. The company is worried about the exchange risk presented by the more vulnerable euro assuming it wins the project. Buying a put option on 10 million euros lapsing in one year would include a tremendous expense for a risk that is at this point unsure (since the company doesn't know if it would be granted the bid).
In this manner, one hedging strategy the company could utilize is buy, for instance, a two-month call on a one-year put on the euro (contract amount of 10 million euros). The premium, in this case, would be altogether lower than it would be assuming that it had rather purchased the one-year put option on the 10 million euros outright.
On the two-month expiry date of the call option, the company has two alternatives to consider. On the off chance that it has won the project contract, is in a triumphant position, yet wants to hedge its currency risk, it can exercise the call option and get the put option on 10 million euros. Note that the put option will presently have 10 months (12 - 2 months) left to expiry. Then again, in the event that the company doesn't win the contract or no longer wishes to hedge currency risk, it can let the call option terminate unexercised and walk away, paying less in premiums overall.
Features
- A call on a put is a sort of trading setup where there is a call option on an underlying put option.
- A call on a put is one of our types of compound options.
- Another trading term is a seagull option, which is comprised of two calls and a put, or two puts and a call.
- Companies could utilize a call on a put during a bidding cycle for a potential work contract.
- A call on a put has two expiration dates and two strike prices, plus two option premiums.
