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.
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 are stock options? Stock options are derivative contracts, each representing 100 shares, that give the holder the right to buy (call) or sell...
A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.
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...