Finance and capital markets
- American call options
- Basic shorting
- American put options
- Call option as leverage
- Put vs. short and leverage
- Call payoff diagram
- Put payoff diagram
- Put as insurance
- Put-call parity
- Long straddle
- Put writer payoff diagrams
- Call writer payoff diagram
- Arbitrage basics
- Put-call parity arbitrage I
- Put-call parity arbitrage II
- Put-call parity clarification
- Actual option quotes
- Option expiration and price
Put vs. Short and Leverage. Created by Sal Khan.
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- If an option is in the money, what is the difference between "selling the option" and "exercising the option"? Which one is better?(5 votes)
- To exercise a call option, you must have the cash to make the buy. If it's berkshire hathaway stock (BRK-A), for 200k per share and sold in 100-share blocks; you are likely much better off, not trying to scrounge $20M to exercise the call option.(9 votes)
- Is it true that call options are more often sold than exercised, even if it's in the money prior to expiration? If so, why would this be?(1 vote)
- All options are almost always sold rather than exercised. The reason is that at the time of expiration, the economic impact of exercising or letting expire is the same, because the price of the option adjusts accordingly.(6 votes)
- Sal didn't mention it, but wouldn't a buying a call when shorting a stock protect you from a potential infinite loss if the stock rises?(1 vote)
- I didn't understand the use of the upfront capital for the short --0:52(2 votes)
- When you ask the brokerage for a stock to short, the brokerage will not just give it to you. They want to make sure that you don't just run away with the stock. So they'll ask for some capital which they can collateralize so that they know that you won't just run away with it.(3 votes)
- In the video, Sal says that the put would've earned him 300% but that is if you exersized the right which is true but what if I sold the option itself?(2 votes)
- Assuming that you are at the end of the option's term, a rational buyer of this option would give you exactly what it is worth: $15, the value of exercising the option. The only thing they could do at this point is exercise it. If you aren't at the end of the option's term, the seller might be willing to pay some premium in addition to the options current value of exercising, for the possibility that the stock will continue to go down. Or they might not be willing, if they think the stock can't go down any more.(1 vote)
- I am confused about the percentage gain for the shorting. Because when the trader makes $30 as profit by shorting, which he sells the borrowed share for $50 and buy back at $20 to give back the shares. However, the trader pays the $25 capital upfront to satisfy the requirement, which is at least 50% value of the borrowed shared. Then the trader's net profit is $30-$25=$5, then the percentage gain must be 5/25= 25% instead of 120% because $30 is not the net profit. In call options and stock cases, they all use net profit to calculate percentage gain, why in the case of shorting, the presenter does not use the net profit?(1 vote)
- The $25 that the trader puts up front is not money he actually pays the broker. Rather it is just an amount of money that the trader has to "set aside" to prove to the broker that he can cover his position. So when the trader closes his trade (buys back the share at $20) he gets his $25 back from the broker.(2 votes)
- I am looking at AAPL's calls and puts. My first very basic question shows my inexperience I know, is WHY is there a put and a call for the price of $220. The Stock price right now is $226, so how does a 'Call for $220' even make any sense?
Does my question even make sense?
- Because the call option is good until expiration, and you don't know what the price of AAPL stock will be then. As you get very close to the expiration date, the price of an "in-the-money" option like that will be equal to the difference between the market price and the strike price. So if that option were expiring today it would be priced at $6 because it lets you buy a $226 for $220. The person selling it to you won't sell it for $5 because she could choose instead to exercise it, pay $220 for the stock and then get $226, which is a profit of $6, which is better than 5. You won't pay $7 for it because if you want a share of stock its better to buy it for $226 than to pay someone $7 for the right to pay $220, thereby costing you $227 for something you ould have paid $226 for.(1 vote)
- Who can you buy these options from, and what are the requirements to do so?(1 vote)
- You buy them from your broker. You have to meet the requirements set by your broker and by regulators to be allowed to have an option account(1 vote)
- If the Potential Gain from Shorting is not as great as from Put Options, why would still be investors who are in favor of Short Sale ? What benefits do they gain relatively from Shorting compared to Put Options ?(1 vote)
- With Put option you can loose all the money you paid to buy the option, if the price does not corss the strike price, or does not do so by the time option expires Whereas in shorting, there is no time bomb ticking. Shorting is not binay, options are, so in shorting you still make money if the price fall is not as much as you expected, but there is a fall anyway. Whereas an option becomes worthless if price does not cross the strike price, within the validity timeframe,(1 vote)
- For Call Option, shouldn't the Gain% be 200% instead of 300%. I was studying risk management there I saw this format to calculate % return on a security, it's 1 + R (return) format.
So, (15/5 - 1) = 200%. Because If we see in case of Stock Gain% i.e. 60% that is in accordance with 1 + R format, (80/50 - 1) = 60% gain....(1 vote)
Let's think about how put options can give us leverage on a downside, or I should say, on a bet that the stock will go down relative to shorting. This one's a little bit more complicated, because shorting is a little bit less intuitive. But if you were to short a stock, in order to short it, you might say hey, I don't have to put any money up front, because I essentially just borrowed the stock immediately. And then I would sell it for $50. But the reality is that you do have to put some capital upfront, because the short can move against you. And usually you have to put at least 50% of the value of the short. So in our short scenario, you would have to put at least $25 up front. And then you would borrow the stock, sell it for $50, and so you'd essentially have $75 to play with that you would eventually have to use to buy back the stock. But the upfront capital is $25. Now, in our scenario where the stock went down, which was a good thing if you're shorting, you want the stock, that was your bet, you want it to go down. In the scenario where the stock went down to $20, you made a profit of $30. You were able to buy that stock for $20, and then give it back to the original person. So you were able to keep that $50, although net for that $20, so you made $30. So you made $30 on a $25 investment. So your gain, you make, what is that? You make $25 and then another $5, so that's 120% gain. So let me write that down. You had made 120% gain. Of course, in this scenario, you gained when the stock went down. In terms of loss here, when the stock went up, the stock went up to $80, we lost $30 by shorting. So we had 120% loss. And it's important to realize, in a short situation, the best thing that could happen for you, is your stock go to zero, in which case you can buy it back for nothing, which means you could keep your $50. So in the best possible scenario, you have to put $25 up front. You can keep the $50 that you got from borrowing and selling the stock. So you could make a 200% percent return. In the worst case scenario, so the best scenario is this is 200%, in the worst case, this would be infinite. So you have to be very careful while you're shorting. But let's think about the put option. In the put option, we only have to put $5 upfront to actually buy the put. And when the stock went down to $20, we made $15. So this was a 300% gain. And on the other side of the equation, when the stock went up, the worst we could do is just lose all of our money. So the worst thing we could do is just lose 100%. So once again, we were able to multiply our gains relative to shorting, although it's a little bit more mixed on the downside, because the put gives you a little bit of protection there.