News

?Those who dabble in the stock market?

Discussion in 'Other Off Topic Forum' started by Michael, Apr 11, 2004.

  1. Michael

    Michael Formula Junior

    Oct 29, 2001
    493
    Nevada
    Full Name:
    Michael
    Please define a put option and give me an example: When I heard the explanation in class, I nodded my head like everyone else out of pride even though I was so confused. I looked in my reading material and became further confused.
     
  2. To remove this ad click here.

  3. bubba

    bubba Formula 3

    May 8, 2002
    1,025
    Hong Kong
    Full Name:
    PPPP
    In a nutshell, it's a contract that gives the holder the right to sell stocks at a pre-set price before the expiration date. It's good for hedging one's stock holdings against a downward market.
     
  4. ashsimmonds

    ashsimmonds F1 World Champ

    Feb 14, 2004
    14,185
    adelaide, australia
    Full Name:
    Humble Narrator
    i think of everything in a beer scale.

    say i'm down the pub with a mate. my mate has to go home, but the barkeep brings us 2 pints at $5 each. i want to drink mine, but i'm not sure if i want my mate's. the barkeep offers to take it back within the next half hour if i don't want it.

    i have now effectively placed a put option on the barman, as i have the option to sell him the beer at $5 for the next half hour.

    say happy hour starts in 15 minutes, and pints are now $3. any time up until the half hour has passed, it is obvious that my pint is still werth $5 (as per our agreement), however the current market deems a pint is werth $3. in this case, i win, as i am able to sell the pint for $2 more than it's werth and the barman HAS to cough up the lucre.

    this is a covered put, in other werds, one in which you already HAVE the stock to get rid of.

    at least that's my simple understanding. :D
     
  5. ty (360mode)

    ty (360mode) Formula Junior

    Sep 25, 2002
    807
    Houston
    Full Name:
    Tim
    that's it... pretty simple. another way to hedge your long position is selling calls. but buying puts allow you to take try and take advantage of a downtrend w/o having to own the stock.
     
  6. gabriel

    gabriel Formula 3

    Yep, and lose 100% of your investment if uncovered and you are not correct on the trend & the timing.
     
  7. To remove this ad click here.

  8. ty (360mode)

    ty (360mode) Formula Junior

    Sep 25, 2002
    807
    Houston
    Full Name:
    Tim
    what are you referring to? buying puts? there's always risk no matter what position or strategy you take. not sure i understand your statement.
     
  9. Michael

    Michael Formula Junior

    Oct 29, 2001
    493
    Nevada
    Full Name:
    Michael
    thanks for your explanations, that's what i thought it was, i guess my teacher was making it sound too complex.
     
  10. Forza1

    Forza1 Formula Junior

    Mar 20, 2004
    486
    California
    Michael, what is your major/career goal? Also, don't be afraid to ask questions. There was an old chinese proverb that I've chosen to live by, it goes something like this:

    He who asks a question is a fool for 5 minutes.
    He who doesn't is a fool for a lifetime.



    -DC
     
  11. Michael

    Michael Formula Junior

    Oct 29, 2001
    493
    Nevada
    Full Name:
    Michael
    My original major career goal when I first started college was Pre-med. That didn't pan out. I was just enjoying independence and college and lost interest in being a doctor (I occassionally get that feeling of "what if" everytime I watch Discovery Health or episodes or ER). Ever since I graduated I've been working in sales. My co worker is in college right now getting his Finance/Economics (minor) degree and has posed a similar question to me many times - Imagine that, some kid still in college asking me, the older one, what I really want to do. You can say I have many interests and only a quarter of initiative. However, NOT THIS TIME! I am determined to increase my income by adding another zero or two to my current yearly salary. I figure I can use my real world sales experience and do something with it. Decided to take a class on stock market investing fundamentals, and on my off days do some reading about real estate (have a buddy of mine who does it on the side and wants to do foreclosures in time). Studying for this and the concepts seems to come easier to me in terms of absorbing the material than all those pre med courses that I've taken. But then it's like comparing apples to oranges. Looks like I may have found my "thing" later than most people. Who knows, maybe if I do good with all this stuff, I'll go back and study to be a doctor. I mean, if there is money to be made, that's great. But I realized if I'm put to the challenge to learn something, I have to be interested in it first. Pre med was something my family wanted/encourgaed/coerced (LOL) me to do.
     
  12. To remove this ad click here.

  13. atheyg

    atheyg Guest

    A straight put gives you the right to sell 100 shares of stock at a given price by a set date.

    say XYZ stock is currently trading at $100 a share, a June put with a strike price of $90 is currently offered at $5 or 5 x 100 = $500, lets say the stock goes nowhere and its now June and the put expires tomorrow. the stock is trading at $93, since you have no more time value left (the put expires tomorrow) the chances are very slim the stock will hit your stike so the put is probably worth next to nothing and you lose your $500, now lets say the stock is trading at $80. your strike was 90- the 80 = $10 x your 100 shares = $1000 profit, you can buy or sell puts or calls many times before they expire so you don't need to wait till the option expires to close out your position.
    The max you can lose is the initial investment or $500 in this case.


    Heres the really cool part lets say your option expires in a week and the put is out of the money you have a 90 strike and the stock is at 94, since the put has very little time value left (intrinsic value) the put is selling for 1/2 or .5 x100 = $50 lets say you buy 10 of them or $500, your analysis is correct the stock suprises the street with bad news and tanks 10 pts in a few days so now its at 84 you are now 6 pts in the money and your option is now worth $6000 or 10 options x 100 shares=1000 shares x $6
     

Share This Page