CALL OPTIONS TRADING FOR BEGINNERS IN 9 MIN.
– PUT AND CALL OPTIONS EXPLAINED Hello and welcome once again to MBABULLSHIT.COM.
Our topic for this video is “Understanding Call Options”.
Remember that you can always go back to MBABULLSHIT.COM.
Let’s get down to it!
In order to first understand “call options”, I’d like to start with a story.
Let’s say there was a man who was interested in a share of stock.
The stock is now worth $100 in the market and he might want to buy it in the next 5
years for also $100.
However, he’s afraid that it might be more expensive in the future and might cost him
more than $100.
So what should he do?
Suddenly he remembers that he knows a rich lady and that he can pay her $1 to make a
contract with her.
In the contract, she guarantees that she will sell him the stock for only $100 any time
in the next 5 years if she wants.
He’s not forced to do it, but he can do it if he wants to do it.
They write that agreement down in this contract.
She guarantees that she will sell him the stock for only $100 even if the stock price
goes up to $200 or $300.
Let’s say that this man is allowed to sell this contract to somebody else who can use
it.
Maybe he changes his mind and he doesn’t want this contract anymore.
He doesn’t need this contract anymore.
Maybe he can sell it to somebody else like to me.
Question: What is this contract now called?
It is called an “Option” contract.
This man now has the choice, the right, or the option to buy this stock from her for
the next 5 years for $100 even if the price goes up.
Specifically, this contract is called a “call option”.
It is the man’s option to buy a share of stock at a give price ($100) for a certain
amount of time.
In our example, it’s 5 years.
Now, the lady here is called the “issuer” of the option.
She earns $1 because the guy paid her $1 in order to motivate her to agree to the contract;
but she also bears the risk in exchange for the $1.
This is very important.
Don’t be confused with the buying and selling of the option contract, which was what happened
right now, versus the buying and selling of the stock, which is possible in the future
if the man wants to use the contract.
Don’t confuse those 2 things.
Another thing, when I said that the man might use the option contract to buy a share of
stock, in MBABULLSHIT language, we say “exercise” the option.
So if an MBABULSHITTER says, “Oh!
I exercise my option!” he sounds so intelligent or whatever with all that bullshit.
He’s just saying that he used the option contract to buy a share of stock, or to sell
it, depending on what kind of option it is.
More on that later.
If you use or take advantage of the option contract, then that means you exercised the
option contract.
If the option is good for 5 years, then we can say that the date at the end of the 5
years is called the “expiration date”.
It’s a the carton of milk, or food that expires.
So we say that the option expires in 5 years.
Very important.
I said that this man can use or can exercise the option any time in 5 years, but actually
in Europe, it’s a special case.
In Europe, you cannot use it any time in the next 5 years or before its expiration date.
In Europe, you must exercise or use the option only on the expiration date itself.
Be very clear about that.
The other thing is we kept on talking about $100 that the man might buy the stock from
the lady.
This $100 is called the “strike” price in MBABULLSHIT language.
Don’t’ confuse that with “option” price, which is simply the $1 that he paid
the lady in order for the lady to agree to the option contract with him.
Lastly, take note that in real life, the man and the woman (the old lady) do not deal directly.
Instead, options are traded in what we call the “options exchange”.
Remember that.
Now that you understand that, you’re ready for our next video on “Put Options”.
If you haven’t watched that video, please watch it.
If you’ve already watched both videos – Put Options and Call Options (this video) – then
you’re ready for the next easy video “Valuing Options at Expiration Date,” which answers
the question “How much is an option worth at Expiration Date?”
You can watch that at MBABULLSHIT.COM.
Hope you learned something!
Please share it if you like it.
On Facebook, we are facebook.com/mbabullshit.
Same with Twitter.
Have a great day and goodbye!