There are times to sit back quietly and take it all in. And there are times, as will.i.am says, to scream and shout and let it all out. If we’re holding onto a type of exotic option known as a “shout option,” chances are good that we should be keeping our eyes peeled for those shouty times.
Why? Because shouting = profits. Allow us to explain.
Options are basically the right—but not the obligation—to buy or sell a security at a specific price and within a specific timeframe. When we call options “exotic,” it means they’ve got some sort of fancy twist to them (and they probably have a higher premium). When we call exotic options “shout options,” it means we can lock in certain profits at certain times during the life of the option, all by “shouting” at our broker whenever the strike price goes high on a call option or low on a put option. We’ll pay more for the privilege, but we might also end up making more money.
Googly Eyes, Inc. stock is currently trading at $24.50 per share, and we buy a call shout option with a strike price of $30. If Googly Eyes stock suddenly shoots up to $40 per share, we can “shout” at our broker, and she can lock in that $10 profit for us. Even if the price goes back down to $31.25, we’ve still locked in our $10. That’s pretty sweet, but this is even sweeter: if the stock price goes up to $45, we’re not just stuck with our measly ten bucks, oh no. We can continue to make money above and beyond the profits we’ve already secured. So, in this example, we’ve locked in $10 in profits, and now it looks like we’re going to make an additional $5. For put shout options, this whole process would just operate in reverse: the lower the stock price goes, the more profit we can potentially secure.
Shout options can be a really good time, but there are a few things we should keep in mind before we plunge in head-first. As mentioned, the premiums for exotic options are always more expensive than they are for “normal” options. That’s because they’re fancy, and fancy stuff...can get pricey. Also, the more volatile the security in question is, the more that premium can cost, since high volatility could mean there’s a lot more potential for profit. And third, because options like these are so complex, we’re not going to find them on major exchanges like the NYSE. They are OTC only. But if we’re looking to bring the action to our investment portfolio in a big way, it might be worth giving shout options a…shout.
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.
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