If there was a 1920s musical about options trading, this might have been the name of Cole Porter song. Instead, we've got "Begin the Beguine."
A call on a put is a relatively simple concept, though it can seem a little complicated if you're a newbie to the options market. To enact the strategy, you buy a call option on a put option.
Remember: in options trading, a call option is the right (but not the obligation) to buy some underlying asset. In this case, the underlying asset is a put option on a separate underlying asset (like a stock, a bond, a commodity or a currency). A put is the right to sell a certain asset and represents a way to bet that the price of the underlying asset will go down.
A call on a put is one of four different compound options (which basically means an option that comes inside another option...like a Russian doll). You think a stock will go down. You don't want to take the risk of shorting the stock directly. However, you're also not ready to use a put option just yet...so you go one step removed: you acquire the right to a put option. This allows you more time to figure out if your guess about the stock is right. (See Call on a Call).
This type of strategy isn't exactly efficient (you have to pay for the call, then if you exercise it, you have to pay for the put). It can also involve a good deal of volatility, because now you're using a derivative of a derivative.
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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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