PUT OPTIONS TRADING FOR BEGINNERS IN 10 MIN.
– CALL AND PUT OPTIONS EXPLAINED Hello and welcome once again!
Our topic for this video is understanding “Put Options”.
Remember you can always go back to MBABULLSHIT.COM.
In order to understand put options, I’d like to first start with a story.
Let’s stay there was a man who owns a share of stock worth $100.
He likes to keep his stock for now.
But maybe in the future, he’d like to sell his stock for at least $100.
Of course, if it’s at least $100 now why would he want to sell it for anything less?
However, he’s afraid that in the future the price of his stock might go below $100
–$50, $20, or even zero.
Suddenly he remembers that he knows a rich lady and that he can pay her $1 to make a
contract with her in order to convince her to sign a contract with him.
In this contract, she says she will guarantee to buy his stock for $100 anytime in the next
5 years, if she wants.
Even if the stock price goes down to zero or $50 or $20… she guarantees that she will
buy it from him for $100.
Let’s pretend that this man is allowed to sell this contract to anybody else who can
use it.
Maybe this guy changes his mind and he says, “You know what, I’m sure that I do not
want to sell this stock in the future.”
Maybe this guy over here, me, also has the same stock and I think I’d also like to
sell this stock for $100 in the future.
What happens here is this guy can sell the contract with the lady to me so that I can
use it instead.
Let’s say that this guy is allowed to sell this contract to anyone else who can use it.
Can you guess what this contract is called?
It’s easy.
It’s called the “option contract”.
This man now has the option or the choice to sell his stock at $100 to her for the next
5 years.
Specifically, it’s called a “Put Option”.
Meaning, this man is allowed to sell at a given price for a certain time, which we know
in this case is 5 years.
The lady here is the “issuer” of the option.
She bears the risk but she earns $1.
She might have the same contract with many, many other guys like this and earn lots of
dollars for taking this with many people.
Very important: Do not get confused with the buying and selling of this option contract,
versus the buying and selling of the stock which possibly can happen in the future.
Other things to remember, when I said that the man might “use” the option contract
to buy or sell the stock (in this case to sell the stock; to buy the stock is in another
case – call option – explained in another video), in MBABULLSHIT language, we usually
say the man “exercises” the option.
So if an MBABULSHITTER says, “Oh!
I exercise my option,” he’s just bullshitting.
What he really just needs to say is he used that option.
If the option is good for 5 years, then the date after 5 years is called the “expiration”
date.
It’s like a carton of milk or a stick of cheese, which has an expiration date.
We can say that the option expired in 5 years.
Very important: I said that this guy can exercise the option any time in 5 years.
In Europe, it’s a special case.
In Europe, he will only be able to use the option on the exact expiration date itself.
Another thing to remember is that, we kept on talking about the man who has the right
to sell the stock for $100 exactly.
In MBABULLSHIT language, we call this $100 the “strike” price.
The $1 he paid the lady is simply the “option” price.
Don’t confuse the two.
Lastly, remember that in real life, the man and the woman probably will not deal directly
with each other.
Instead, options are traded in what we call “options exchange”.
Keep that in mind.
Now that you understand “Put Options”, you’re ready for my next easy video on “Call
Options” which is an option to buy a share of stock.
If you haven’t watched that yet, you may watch it.
If you’ve watched both videos, you’re ready for my next easy video “How to Value
Options at Expiration Date,” which answers the question “How much is an option worth
at an expiration date?”
You can watch that at MBABULLSHIT.COM.
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Have a great day and goodbye!