It sounds like something a physicist might try to replicate in a lab, but a floortion is actually something that can help us sorta kinda hedge our bets in certain financial markets.
All investments carry some type of risk. But we can try to mitigate some of that risk by (instead of buying or selling actual options) buying or selling options on options. It’s like saying, “We’re not sure we want this thing, but if its price changes and meets these conditions here, then we might want to buy it.”
A floortion is one of those option options; basically, we buy (or sell) the right to buy (or sell) an option if it hits a certain low price, or price floor. We don’t have to buy/sell it, but we have the right to buy/sell it. And if it goes below that price floor, we get a little payout.
Floortions come with a predetermined date range; if the option doesn’t decrease to or beyond our chosen strike price by, say, December 1, then we could forfeit the right to exercise it.
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
The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.
A naked option isn't as risqueé as it sounds...it's just an option you sell without having enough of the underlying security to cover your butt if...
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...