Chapter 01 · Section 1.1

Watchmaker Case Study - Summary

Here is a summary of what the watchmaker can do if he buys call options as soon he tenders a firm offer:

             
              RECEIVES ORDER             ORDER IS CANCELLED    
Gold prices   Makes no use of option,    Makes no use of option;
DECLINE below buys at market price.      may resell option. 
$400/oz

Gold prices   Uses option to buy gold    Makes use of option and
RISE above    at $400/oz.                resells gold at profit 
$400/oz                                  or resells options.