When you own a put, you are long it.
That is, you paid, say, a buck a share for the right to sell DIS(ney) for $110 any time in the next few weeks, before that put option expires. With the stock trading now at $117, it's likely that the put never executes, but they are reporting their quarter tomorrow and you're a bit nervous. And DIS is a huge part of your portfolio's exposure and performance for the quarter in the hedge fund you run. You really want to clip a big fat carry profit participation coupon for the quarter (your new husband is high maintenance; he likes Porsches).
So you buy "portfolio life insurance" on that stock, paying that dollar to guarantee that, at worst, if DIS craps the bed in its Q, and goes to $100, you're protected at a minimum down number to your porftolio of $110. You got there by being long this put option.
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...