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Finance: What are stock options in 90 seconds or less? 0 Views
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Description:
What are stock options? Stock options are derivative contracts, each representing 100 shares, that give the holder the right to buy (call) or sell (put) a stock at a specified strike price before a designated expiration date, usually the 3rd Friday of each calendar month. Stock options can also be a form of additional compensation to employees and executives of a public company. Stock options usually vet at a strike price but are worthless until the stock price is at or above the strike price in order to avoid income taxes that would be otherwise due.
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Transcript
- 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
- 00:11
This one makes an anti constipation drug It's trading at
- 00:14
one hundred eighty bucks a share Okay so here's an
- 00:16
option of buy a share of ibm anytime in roughly
Full Transcript
- 00:19
the next three months For one hundred ninety dollars a
- 00:21
share it's called a call option If you really believe
- 00:24
the ibm will go to say two hundred dollars a
- 00:26
share in the next three months well you'd be what's
- 00:28
called ten dollars in the money then or then have
- 00:31
a stock option or call option with a strike price
- 00:34
of one hundred ninety dollars which would then have intrinsic
- 00:37
value of ten bucks a share On the other end
- 00:39
of the buy sell desk is the gal willing to
- 00:42
sell you that call option for three bucks Three bucks
- 00:45
a premium So gut check time Would you pay three
- 00:49
dollars for the right to buy a share if ibm
- 00:52
for ten dollars higher than where the stock's trading now
- 00:55
today Meaning that to break even in the next three
- 00:58
months the stock has to trade all the way up
- 01:00
from one hundred eighty dollars a share to one hundred
- 01:02
ninety three dollars a share jobs for you to get
- 01:04
your money back but it goes to two hundred two
- 01:06
share Well if you sell that option you'll have invested
- 01:09
three bucks a share for a net return of seven
- 01:11
bucks in just three months or less And yes we're
- 01:14
ignoring commissions and taxes here because well in problems like
- 01:17
this or just a in the book but three dollars
- 01:19
into seven only three months Yeah that's a great score
- 01:21
You'd have more than doubled your money And on an
- 01:24
annualized return basis that's over a nine hundred percent dish
- 01:27
return really good score but with a much more likely
- 01:30
case that you spend three bucks to buy the option
- 01:32
and it expires totally worthless And then you've lost your
- 01:35
entire investment in that option So that's a call option
- 01:38
It's evil twin is a put option So whereas a
- 01:41
call options the rightto by a security to set price
- 01:45
by a certain set date a put option is the
- 01:47
right to sell that option We'd go into more detail
- 01:49
here but we're promised ninety seconds
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