Is It Really Interesting to Invest in Option Rather Than in Its Underlying Stock?

Yves Rakotondratsimba

Abstract


Despite the suggestion made by investment banks and brokerage firms for private investors to substitute one or all part of their stock investment by the associated option, the real benefit obtained from dealing with an option rather than with its underlying stock remains to be understood.

To clarify the situation, instead of founding our argumentation on specific past data, we build a general analysis of the option return and a comparison of this last with the underlying asset relative change. Using market and synthetic data on option prices, it appears that for many situations investing in an option may be less interesting than investing directly in the related underlying stock.

However there is no definitive answer about the superiority or not of investing in the option, since the situation depends on the level of asset change at the investment maturity. It is up to the investor to decide the best investment support to choose, depending on her views on the future asset relative change and on the option characteristics which are available on the markets. The formulas we derive here may be helping in performing this task.


Full Text: PDF DOI: 10.5539/ijef.v2n5p15

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This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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