Canary Call

  

Categories: Derivatives, Bonds

I tawt I taw a putty tat! But I didn't. It was a step-up bond. And it was only callable before the first step-up period ended. (First to die...like a canary in a coal mine.) And only on pre-specified dates. Sufferin' succotash!

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Finance: What Is a Call Option?25 Views

00:00

finance a la shmoop. what is a call option? option? option, where are you? okay

00:09

yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]

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is the right to call or buy a security. the concept is easy the math is hard.

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you think Coca Cola's poised for a breakout as they go into the new low

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calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]

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call option for $1. well that call option buys you the right

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to then buy coke stock at 55 bucks a share anytime you want in the next

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hundred and 20 days. so let's say Coke announces its new sugarless drink flavor

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zero it's two weeks later and the stock skyrockets to fifty eight dollars a

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share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]

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so you buy the stock and you're all in now for fifty five dollars plus one or

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fifty six bucks a share and your total value is now fifty eight bucks. well you

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could turn around today and sell the bundle that moment, and you'll have

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turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]

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stock not skyrocketed so quickly well you would have lost everything. still you

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lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]

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options. as for Coke flavor zero turned out to be nothing more than canned water.

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