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16. What is the theoretical reason options exist?

 

  • Companies would like people to purchase put options for their stocks, because it reduces their risk. Call options serve as the natural extension of put options.
  • A single stock price does not represent a single risk; it represents many risks, which matter in different ways to different people.
  • Companies would like people to purchase call options for their stocks, because then it reduces their risk. Put options serve as the natural extension of call options.
  • Options serve the same role as insurance for investors, because they are able to insure themselves against large losses for long periods of time.

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