“Once in a blue moon…” goes the song from Little Mary Sunshine, a musical which you've, uh...never heard of.
Or...perhaps you’re familiar with the common expression, as in, “Once in a blue moon, Pat will buy a round of drinks.”
Referring to a month that has two full moons instead of the usual one, the term blue moon has now come to mean a rare event.
And the moon isn’t even necessarily blue. In the finance world, a blue month is one in which trading on options and futures contracts are the most active. It could happen in any particular month, but hedge fund managers and large financial institutions study a blue month to find any trading signals that indicate whether the market will go up or down.
Example.
Maureen owns 15,000 shares of Future for You, Inc. that are valued at $2.50 a share. Looking at the general direction of the market, she starts to worry that the price could go down. So she decides to protect herself, entering into a futures contract with James, who thinks the price will go up.
Their contract states that James will buy Maureen’s 15,000 shares one year from now at $2.50. When many such contracts are taking place during the same month, that’s a blue one.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...