Options are a way to hedge your risk when investing in the stock market. An options contract gives the buyer the right to buy or sell a stock at a future date. A call option gives the buyer the right to buy shares of stock in the future at a specific price and date.
Say you are interested in possibly buying shares of Rising Stock Company since you have a good feeling about the shares increasing in value. But the shares of Rising Stock Company are expensive, say $500 a share and you don’t want to invest in the shares just now. So, you can buy the option to purchase the shares of stock at $520 by a future date. The options price is low, say $5 per option. If the stock starts moving, and hits $520 with expectations of further increases, you exercise your options and buy the shares at $520. If the stock increases, and you sell them for more than $520 per share, you have made a profit. However, if your hunches were wrong and stock actually decreased or didn’t increase to your strike price, you do not have to exercise your options and they will expire. You will just be out the $5 per option you bought.
You can also buy put options, in which you make money when the stock price drops. Works the same way, just in the opposite direction.
Annapurna options are one of the “mountain range" options. These are options based on a basket of securities, rather than just one, over a range of time frames. Referred to as “exotic” options, and having been developed by the French, each of the different mountain ranges presents differing strategies for success.
For example, the Atlas option removes the best and worst performing stocks, while the Everest option pays out based upon the worst-performing securities in the basket. The Annapurna options reward investors when all of the securities in the basket do not fall below a certain price during its time period.
Don’t be fooled by these mountain range names. While the reason for buying mountain range options is to mitigate volatility risk, the reward does not increase just because you climb higher.
Related or Semi-related Video
Finance: What is a naked option/position...7 Views
Finance a la shmoop what is a naked option or naked option position? alright
warning you're going to be disappointed in this video it's not nearly as hot as [Censored man jumps into lake]
you probably hope naked options are just options that you sell or buy without
having enough of the underlying security to cover your if the price changes in
the wrong direction all right well they're an investment
that stands on their own but with extreme amounts of risk.....You invest [Man discussing investment in a lake]
$10,000 in coca-cola stock at 40 bucks a share buying 250 shares the stock goes
up $2 in a year or 5% not a bad score and you've made a whopping five percent on
your money or about five hundred bucks you bought the stock not the option and
remember when you own the stock you can own it forever there's no clock ticking [Clock ticking by]
in the background like there is with an option okay but let's say you had spent
that same 10 grand worth of naked coca-cola call options on options with a
strike price of 42.50 expiring in four months well the stock remains at 42.50
the whole time doesn't budge well guess what you've lost all of your money [Man with empty jean pockets]
had the stock under $45 however that 10 grand invested in those call options
which bought you exposure to some 20,000 shares would have made you something
like 250 a share that's of in-the-money value on those options times 20,000
shares or 50 grand yeah way more than your boring experience of just owning
the stock and making a whopping 500 bucks but you'll also risk losing
everything and this kind of foot's with whole notion of risk and reward being [Man in between reward and risk]
married in some unholy alliance where they kind of wrestle and yell at each
other all the time right so you took a lot of risk in buying
call options with nothing behind them you bought em naked
you could have made a fortune but you didn't because he played it safe and
bought the stock well in reality professional investors rarely just buy
naked options alone because they are so risky and so volatile but every now and [Ball spinning on roulette wheel]
then somebody bets the ranch on 22 black it comes up they make 36 times their
money in a week and everyone asked them for the best way to angle their thumb
when they're trying to flip a head on a quarter and we actually have a whole
video on that you should watch it it's kind of depressing...
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...