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Finance: What are stock options in 90 seconds or less? 0 Views


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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

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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