Net Option Premium
Some option strategies involve multiple legs. That means you are simultaneously buying and selling different options, either to set up a series of hedges or to profit from a highly specific scenario.
The net option premium measures the profit or cost that setting up that series of options generates. Take the total gain of all the options you sold (minus commissions) and subtract the total cost of all the options you bought (minus commissions). A positive number means you earned money from setting up the options strategy. A negative number means you spent money (though you still might profit later if your options pay off).
You're an options trader. You buy 10 calls for candy-maker Big Sugar Slow Munchies Inc., costing you $5. Meanwhile, you sell 5 puts for the same strike price for Big Sugar, each grossing you $3. So you paid $50 for your calls, but earned $15 for selling the puts. That series of transactions leads to a net option premium of negative $35. You paid $50, but brought in $15. On a net basis, it cost you $35 to set up those deals.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
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