Fin Art

CMA USA PART -2
TOPIC # OPTIONS
Note: 1 (Will continioue)

In security trading, an option is a financial contract that gives the buyer the right, but not the obligation,to buy or sell an underlying asset (such as a stock or ETF) at a set price within a specific timeframe
Strike Price: The fixed price at which the underlying stock can be bought or sold.
⭕ Call Option gives the buyer the right—but not the obligation—to purchase a stock at a fixed price (strike price) before a specific date
⭕ A Put Option gives the buyer the right—but not the obligation—to sell a stock at a fixed price (strike price) before a specific date

⭕ In options trading, "Long" and "Short" refer to the position a trader takes in the contract. They describe whether a trader bought the contract or sold it

💠 The Long Party is the investor who buys the options contract. They pay money upfront to secure specific rights.
 Long Call: Buys the right to buy a stock (expects the price to go up).
 Long Put: Buys the right to sell a stock (expects the price to go down)

♀️ They hold all the decision-making power.
♀️ They choose whether to exercise the option or let it expire.
♀️ They are never forced to do anything

💠 The Short Party is the investor who sells (or "writes") the options contract. They take on a legal obligation in exchange for immediate cash

♂️ They sell the option and collect the cash premium upfront.
♂️ They must wait and see what the Long Party decides to do.
♂️ If the Long Party decides to exercise the option, the Short Party must fulfill their end of the contract

✅ Example
Stock of Alfa Company is trading at $50.You agreed to pay a $3 premium per share for 100 Shares, and for a $45 Strike Put Option expiring in one month.
Two weeks later, Alfa Stock price fall in to $35.
So, you exercise your right to sell 100 shares at your locked-in price of $45 instead of the market price of $35.

Your net profit: $45 strike price – $35 market price – $3 premium = $7 per share ($700 total)



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Operating Cycle VS Cash Conversion Cycle

An enterprise must invest liquid capital into inventory, which remains stored for a distinct period before a sale is actualized. If sales are conducted on credit, additional time is required to collect the outstanding receivables. The cumulative timeframe from the initial purchase of inventory to the final collection of cash defines the Operating Cycle.

This lag in liquidity directly restricts operational cash flows and limits the business's ability to seize alternative investment opportunities. To bridge this deficit, short-term financing options like bank loans can be highly effective; however, this strategic decision demands a thorough evaluation of interest expenses and associated financial burdens.

Alternatively, utilizing supplier credit (credit purchases) offers a viable solution, though management must carefully analyze any premium added to the purchase price by the vendor.

Ultimately, managing the interplay between the inventory holding period, the accounts receivable collection period, and the accounts payable payment period forms the basis of the Cash Conversion Cycle. By strategically balancing receivables against payables, a finance leader can optimize working capital and maintain a resilient, positive cash flow.

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