If there was a 1920s musical about options trading, this might have been the name of Cole Porter song. Instead, we've got "Begin the Beguine."
A call on a put is a relatively simple concept, though it can seem a little complicated if you're a newbie to the options market. To enact the strategy, you buy a call option on a put option.
Remember: in options trading, a call option is the right (but not the obligation) to buy some underlying asset. In this case, the underlying asset is a put option on a separate underlying asset (like a stock, a bond, a commodity or a currency). A put is the right to sell a certain asset and represents a way to bet that the price of the underlying asset will go down.
A call on a put is one of four different compound options (which basically means an option that comes inside another option...like a Russian doll). You think a stock will go down. You don't want to take the risk of shorting the stock directly. However, you're also not ready to use a put option just yet...so you go one step removed: you acquire the right to a put option. This allows you more time to figure out if your guess about the stock is right. (See Call on a Call).
This type of strategy isn't exactly efficient (you have to pay for the call, then if you exercise it, you have to pay for the put). It can also involve a good deal of volatility, because now you're using a derivative of a derivative.
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.
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