Ok, this is not "buy-right"...like, wait for the squeezably soft Charmin to go on sale at Safeway and then buy it right, i.e. at a 4% discount, with Dad filling up the back seat and trunk with 500 rolls, mumbling that you're all set now for any form of Thai food the world might throw at you.
No. Buy-write is a trading strategy in options where an investor buys a particular stock, and at the same time sells a call option on the stock (an option to purchase the stock at a later date). The way the investor makes money is from the sale of the option premium, and she incurs less risk because it's covered by the value of the stock.
The price of the option should be higher than what the investor paid for the stock, but not too much higher. Otherwise, if the current market price of the stock is lower, the value of the option premium will go down.
The best possible situation is if the stock does not go up in the short-term, but will be higher in the long-term. An example of how this could work is if a hopeful investor decides that Make Money Later, Inc. might make some money in the long-term rather than the short-term, since its product set is fairly new to the market. So he buys 200 shares at its market price of $20 per share. Since he doesn’t expect the price to go up much in the short-term, he also writes a call option for Make Money Later at an exercise price of $22.50. If Make Money Later stays under $22.50, the investor will simply keep it. If the price goes above $22.50, the investor will have to sell his shares to the option holder for $22.50. If the market price is now $24.00, the investor loses out on the additional profit, but it’s not money out of his pocket, just an opportunity missed.
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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.
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