DQ1 A real option can be defined as a situation in which an investor is able to choose between two different investments where both choices involve tangible assets (Thefreedictionary, 2012). I agree with you that transaction costs must be considered and paid close attention to when dealing with real options. Your comment about the importance of good information was very informative. In the business world of the 21st century information systems are a critical success factor. Good information systems add value to a corporation (Huridocs, 2011). Options are part of the derivative market. In 2008 the U.S derivative market was estimated to be worth over $600 trillion (Sheridan, 2008). Information asymmetry is imperative for the derivative market to function properly. I have a friend that invested $5000 in the derivative market last year. He lost the majority of his money because he did not perform good research and because he took big chances that did not pay off.
An option is a privilege sold by one party to another which offers the buyer the right to buy (call) or sell (put) a security at an agreed-upon price during the specified period or on a specified date (Teweles &. Bradley &. Teweles, 1992). I did not realize prior to doing research on this subject that the U.S derivative market is worth over $600 trillion. To become an investor in the derivative market with instruments such as options one must be an advance or institutionalized investor. I would not recommend a novice investor to invest money in options. People entering the stock market are better suited to invest in financial instruments such as mutual funds. I agree with you that volatile markets lead to volatile pricing. A real life example of that effect is what occurs with food prices when scarcity influences the market. “Volatility in and of itself is a measure of price movement over a given period of time” (Learn-stock-options-trading, 2009). Risk must be considered when investing in options. “The vast majority of works on option pricing operate on the assumption of risk neutral valuation” (Ben-Meir, Schiff, 2012).
Ben-Meir, A., Schiff, J. (2012). The Variance of Standard Option Return. Cornell University. Retrieved May 31, 2012 from http://arxiv.org/abs/1204.3452
Huridocs.org (2011). Why are information systems important? Retrieved May 31, 2012 from http://www.huridocs.org/information-systems/
Learn-stock-options-trading.com (2009). Stock Option Volatility. Retrieved May 31, 2012 from http://www.learn-stock-options-trading.com/option-volatility.html
Sheridan, B. (2008). 600,000,000,000,000? Retrieved May 31, 2012 from http://www.thedailybeast.com/newsweek/2008/10/17/600-000-000-000-000.html
Teweles, R., Bradley, E., Teweles, T. (1992). The Stock Market (6th ed.). New York: John Wiley &. Sons.
Thefreedictionary.com (2012). Real option. Retrieved May 31, 2012 from http://financial-dictionary.thefreedictionary.com/Real+Option