You really like the prospects of a new tech company called Wild Data Inc. You buy their shares at $100 a share. Then...you start to get worried. The firm's CEO keeps talking about the healing power of crystals in interviews, and mentioning how they used to be Fredrick William III of Prussia in a former life. You still think the shares will rise in the future, but you want a hedge against the firm's flakey CEO. You decide to buy a protective put.
A put is an option that pays off if the value of an underlying asset goes down. Essentially, it represents a short on the asset.
In your case, you hope you won't need to use it. You hope shares of Wild Data go up. But you buy the put in case they drop.
If the stock goes up (like you think it should), no big deal. You are out the price of the option, but that's it. Small price to pay for piece of mind. If the stock goes down, you're protected. You'll lose money on the lowered share price, but you'll make money from the put. Hopefully enough to offset your losses.
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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]
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...
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...
What are stock options? Stock options are derivative contracts, each representing 100 shares, that give the holder the right to buy (call) or sell...