Options are a way to hedge your risk when investing in the stock market. An options contract gives the buyer the right to buy or sell a stock at a future date. A call option gives the buyer the right to buy shares of stock in the future at a specific price and date.
Say you are interested in possibly buying shares of Rising Stock Company since you have a good feeling about the shares increasing in value. But the shares of Rising Stock Company are expensive, say $500 a share and you don’t want to invest in the shares just now. So, you can buy the option to purchase the shares of stock at $520 by a future date. The options price is low, say $5 per option. If the stock starts moving, and hits $520 with expectations of further increases, you exercise your options and buy the shares at $520. If the stock increases, and you sell them for more than $520 per share, you have made a profit. However, if your hunches were wrong and stock actually decreased or didn’t increase to your strike price, you do not have to exercise your options and they will expire. You will just be out the $5 per option you bought.
You can also buy put options, in which you make money when the stock price drops. Works the same way, just in the opposite direction.
Annapurna options are one of the “mountain range" options. These are options based on a basket of securities, rather than just one, over a range of time frames. Referred to as “exotic” options, and having been developed by the French, each of the different mountain ranges presents differing strategies for success.
For example, the Atlas option removes the best and worst performing stocks, while the Everest option pays out based upon the worst-performing securities in the basket. The Annapurna options reward investors when all of the securities in the basket do not fall below a certain price during its time period.
Don’t be fooled by these mountain range names. While the reason for buying mountain range options is to mitigate volatility risk, the reward does not increase just because you climb higher.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
Up Next
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...
A naked option isn't as risqueé as it sounds...it's just an option you sell without having enough of the underlying security to cover your butt if...