Ok, this is not "buy-right"...like, wait for the squeezably soft Charmin to go on sale at Safeway and then buy it right, i.e. at a 4% discount, with Dad filling up the back seat and trunk with 500 rolls, mumbling that you're all set now for any form of Thai food the world might throw at you.
No. Buy-write is a trading strategy in options where an investor buys a particular stock, and at the same time sells a call option on the stock (an option to purchase the stock at a later date). The way the investor makes money is from the sale of the option premium, and she incurs less risk because it's covered by the value of the stock.
The price of the option should be higher than what the investor paid for the stock, but not too much higher. Otherwise, if the current market price of the stock is lower, the value of the option premium will go down.
The best possible situation is if the stock does not go up in the short-term, but will be higher in the long-term. An example of how this could work is if a hopeful investor decides that Make Money Later, Inc. might make some money in the long-term rather than the short-term, since its product set is fairly new to the market. So he buys 200 shares at its market price of $20 per share. Since he doesn’t expect the price to go up much in the short-term, he also writes a call option for Make Money Later at an exercise price of $22.50. If Make Money Later stays under $22.50, the investor will simply keep it. If the price goes above $22.50, the investor will have to sell his shares to the option holder for $22.50. If the market price is now $24.00, the investor loses out on the additional profit, but it’s not money out of his pocket, just an opportunity missed.
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.
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...