Discussions Essay Example | Topics and Well Written Essays - 500 words - 13

Discussions - Essay Example This is because the power of choices is in their versatility, and it enables the investor to adjust their position as per the prevailing situation or circumstances. However, this versatility has its cost and, therefore, the investors should assess this extra cost based on their knowledge and skills. Options also involve a risk which is not suitable for all investors. One should, therefore, be in a position to evaluate the risk associated and develop measures for managing such risks. Being ignorant of such risks will place the investor in a weak position. Stock options are the agreement between two parties to sell or buy an asset. It is the contract that gives one party the right. It does not give the responsibility to buy or sell an asset in the future at a pre-set price known as the strike price or exercise price (Fabozzi, 2008). There are two types of options; call option and put option. Call option is the financial contract that gives the buyer the right but, not the obligation to acquire a given number of assets in the future at a predetermined price. On the other hand, put option gives the right but not obligation to sell a specific number of underlying securities at some future date (Fabozzi, 2008). It is essential to review the proforma quantification in the footnotes periodically in order to access more information concerning the options. Even though the expense is expected not to persist, it changes as the situation changes and as investors, one should continually assess the information to be able to adjust the value or the cost of the option. Consumer spending theory states that, people spend their money at a level that is consistent with their expected average income. The steady average income which is long term is referred to as permanent income. Any individual will only save if his or her current income is higher than the expected permanent income (Thaller, 1981). This implies that people will only