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 Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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