Writing An Option

  

Categories: Derivatives, Trading

It's just selling an option.

Like...in the land of covered calls, I own 1,000 shares of KO and I'd be happy selling them for 50 bucks. With the stock now at $42, I'm happy to write you an option with a strike price of $50 to sell that option to you, or write it, for a buck a share. Any time from now until 5-ish months from now when it expires on the 3rd Friday of the month, for a buck, you have the option to buy a call option on KO with a $50 strike.

See: Everest Option. See: Call Option.

Related or Semi-related Video

Finance: What are stock options in 90 se...0 Views

00:00

Finance allah shmoop what are stock options in ninety seconds

00:05

or less Here's a stock ibm not the tech company

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This one makes an anti constipation drug It's trading at

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one hundred eighty bucks a share Okay so here's an

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option of buy a share of ibm anytime in roughly

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the next three months For one hundred ninety dollars a

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share it's called a call option If you really believe

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the ibm will go to say two hundred dollars a

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share in the next three months well you'd be what's

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called ten dollars in the money then or then have

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a stock option or call option with a strike price

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of one hundred ninety dollars which would then have intrinsic

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value of ten bucks a share On the other end

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of the buy sell desk is the gal willing to

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sell you that call option for three bucks Three bucks

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a premium So gut check time Would you pay three

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dollars for the right to buy a share if ibm

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for ten dollars higher than where the stock's trading now

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today Meaning that to break even in the next three

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months the stock has to trade all the way up

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from one hundred eighty dollars a share to one hundred

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ninety three dollars a share jobs for you to get

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your money back but it goes to two hundred two

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share Well if you sell that option you'll have invested

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three bucks a share for a net return of seven

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bucks in just three months or less And yes we're

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ignoring commissions and taxes here because well in problems like

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this or just a in the book but three dollars

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into seven only three months Yeah that's a great score

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You'd have more than doubled your money And on an

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annualized return basis that's over a nine hundred percent dish

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return really good score but with a much more likely

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case that you spend three bucks to buy the option

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and it expires totally worthless And then you've lost your

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entire investment in that option So that's a call option

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It's evil twin is a put option So whereas a

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call options the rightto by a security to set price

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by a certain set date a put option is the

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right to sell that option We'd go into more detail

01:49

here but we're promised ninety seconds

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