The elevator to your 11th floor apartment is broken. You asked the super how you're supposed to get to your place. He suggests what he calls "the ladder option." (You immediately start googling rental options in your neighborhood.)
Actually, this term has to do with the options market. A normal option grants its holder the right, but not the obligation, to buy or sell some underlying asset (like a stock or a commodity) at a set price during a pre-set time period. The pre-set price is known as the strike price. Traditional, vanilla options have a single strike price.
So you might hold an option to buy 100 barrels of oil at $75 a barrel, with the option expiring in May. The $75 represents the one and only stock price for that option.
In contrast, a ladder option has a series of strike prices. Like a ladder, it has numerous rungs, leading up or down (depending on whether you have a call or a put, betting either that the price of the underlying asset would go up or down).
If you buy a ladder option, you get some profit if the first strike price level is meant, and then additional profit with each additional level reached.
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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.
Up Next
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What are stock options? Stock options are derivative contracts, each representing 100 shares, that give the holder the right to buy (call) or sell...
The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.