Bermuda Option

  

Categories: Derivatives, Stocks, Trading

When you have enough money, it's the ability to spend the rest of your life hanging out on a beach in Bermuda.

It's also the name of a position you can take in the options market. Bermuda options combine aspects of so-called American and European options (See: Atlantic Spread). Where else would Europeans and Americans choose to meet each other except Bermuda? (Rio perhaps? L.A.? Certainly not Greenland...)

In brief, a European option can be exercised only on a specific, pre-set date. Meanwhile, an American option can be exercised at any time before its set expiration. A Bermuda option has multiple potential exercise points, though they come at regular intervals.

Think of a European option as driving a car down a straight road that only goes between two points, like a remote desert highway ("cool wind in my hair/warm smell of colitas, rising up through the air"). Meanwhile, an American option is like having an all-terrain vehicle on the same highway. You can't go beyond the final destination, but you can get off the road any time, at any place ("you can check out any time you like/but you can never leave").

Now, a Bermuda option is like a driving on a highway with regular off ramps (no "Hotel California" lyrics really fit here, so we'll just say "so I called up the captain/'please bring me my wine'" just because it's fun to order wine). You can't go offroading anywhere you want, but you have choices as to when/where you leave the road.

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Finance: What is a greenshoe option?15 Views

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finance a la shmoop what is a greenshoe option. oh you should be so lucky

00:09

green shoes on leprechauns and investment bankers are such a good thing. [leprechaun smiles]

00:14

why? well because when there is so much excess money laying all over the floor

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your shoes turn green from the bills as you take whatever money you can carry

00:25

and run. that's how the name happened anyway a greenshoe option is a deal term

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that an investment bank negotiates for in an IPO they run. and that IPO remember

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is an initial public offering of stock. this can apply also to secondary

00:40

offerings and other kinds of offerings but we're focused on an IPO here as a

00:43

green shoe lives. if that IPO is marketed so well and there is so much demand for

00:49

shares in the company from the public that the bank believes it can raise the

00:53

IPO price and sell more shares to the public then that IPO was a huge winner.

00:59

the bank will exercise its greenshoe option and instead of selling 30 million [money falls from the sky]

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shares of Chucky LARM calm to the public at 12 bucks a share well it'll bring the

01:09

company public at 15 bucks a share and sell 40 million shares. the math? it

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raises 600 million bucks in the latter green shoe field option versus 360

01:21

million bucks in the former. the green shoe is the extra 10 million shares that

01:27

the bank can sell and get commission on while doing so. and if you think about

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that world as a 5% kind of Commission world well the banks go from 18 million

01:37

in total Commission's to 30 million. yeah nice freakin bump especially when

01:42

there's a basic fixed cost of maybe 10 million dollars in either case. so you

01:47

make a lot more profit on the 30 million story here yeah? all right and having

01:51

more shares out there trading is a good thing for the company because its shares

01:55

are then more liquid. it's easier to buy and sell larger blocks of stock and the [stocks being sold in a graphic]

02:00

big institutions like that. they tend to then take a lot more

02:03

interest in the stock and usually that leads to higher stock prices down the

02:06

line. and all that liquidity or movement shares trading back and forth well

02:11

that's more Commission dollars in the future for the bank. so check your shoes

02:16

if they're green well you're either in the money or you should really get Rover

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to the vet. [green poo on a wood floor]

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