It sounds like a bad translation of a manga title. But it actually refers to a type of derivatives strategy.
The structure involves buying and selling multiple options for the same underlying asset, possibly using multiple strike prices and expirations. Each part of the strategy is known as a "leg." The goal is to hedge a main bet, or to take advantage of a specific situation.
Examples of these multi-leg situations include butterflies, strangles, and straddles (again, sounds like we've dipped into one of the more adult-themed manga titles here).
Let's take a straddle as an example. It consists of purchasing a put and a call for the same underlying asset. The strike prices and the expirations are both the same as well.
The call represents one leg of the straddle. The put provides the other. A call is a bet that the price of the underlying asset will go up and a put is a bet that the price will go down.
In a straddle, the investor wins no matter which direction the asset moves, as long as it moves far enough to make up the cost of buying the put and the call. It represents a bet on volatility in general. In other words, it's not a bet about which way an asset will move. It's a bet on how far.
The investor thinks it will rise or fall by a large amount, and has set up a multi-legged strategy to take advantage of this projected move.
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Finance: What are stock options in 90 se...0 Views
Finance allah shmoop what are stock options in ninety seconds
or less Here's a stock ibm not the tech company
This one makes an anti constipation drug It's trading at
one hundred eighty bucks a share Okay so here's an
option of buy a share of ibm anytime in roughly
the next three months For one hundred ninety dollars a
share it's called a call option If you really believe
the ibm will go to say two hundred dollars a
share in the next three months well you'd be what's
called ten dollars in the money then or then have
a stock option or call option with a strike price
of one hundred ninety dollars which would then have intrinsic
value of ten bucks a share On the other end
of the buy sell desk is the gal willing to
sell you that call option for three bucks Three bucks
a premium So gut check time Would you pay three
dollars for the right to buy a share if ibm
for ten dollars higher than where the stock's trading now
today Meaning that to break even in the next three
months the stock has to trade all the way up
from one hundred eighty dollars a share to one hundred
ninety three dollars a share jobs for you to get
your money back but it goes to two hundred two
share Well if you sell that option you'll have invested
three bucks a share for a net return of seven
bucks in just three months or less And yes we're
ignoring commissions and taxes here because well in problems like
this or just a in the book but three dollars
into seven only three months Yeah that's a great score
You'd have more than doubled your money And on an
annualized return basis that's over a nine hundred percent dish
return really good score but with a much more likely
case that you spend three bucks to buy the option
and it expires totally worthless And then you've lost your
entire investment in that option So that's a call option
It's evil twin is a put option So whereas a
call options the rightto by a security to set price
by a certain set date a put option is the
right to sell that option We'd go into more detail
here but we're promised ninety seconds
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...
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...
The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.