Kinda late to the show here, but do you have any articles or anything to get a better understanding of puts, calls, options etc?
I learned a lot of what I know from studying for actuarial exams. I specialized in the investment track (like picking a major)
I’ll write out some overview stuff and would be happy to expand on anything
At the highest level, an option is a financial agreement that gives one party the option to buy or sell a stock at a specified date in the future (called the option expiry) at a specified price (called the strike price). 1 option contract has an underlying of 100 shares of stock.
The option writer (also called seller) gives the option buyer the option but not obligation to transact at the expiry date for the strike price.
a call option gives the option buyer the right to buy shares of the stock at the stock price in the future.
a put option gives the option buyer the right to sell shares of the stock at the stock price in the future.
I think an example will help. Let’s say a stock is trading for 20 right now. And let’s say you’re holding 1 3-month call option with a strike price of 22. That means in a month you have the option to purchase the stock for $22 per share.
fast forward 3 months in the future and let’s look at 2 situations
1. the stock price is 18
2. The stock price is 30
in situation 1 you would NOT exercise your option to buy 100 shares for 22 dollars per share because You would be paying more than they’re currently worth. If you wanted to 100 shares you could just buy the stock at 18 per share instead ofchoosing to pay 22
in situation 2, you would exercise your option to buy 100 shares for 22 dollars per share because it is a cheaper price than you get on the market currently. But what if you don’t want 100 shares of the stock anymore? Well, you can exercise your option to buy the stock for$22 and then immediately sell that stock for 30, gaining 8 dollars per share (in practice options are often cash settled so you would just get $8*(100)=800 as your payoff in cash
A put is analogous on the flip side. You want the price of the stock to go down so that you can sell at a higher price than the stock currently trades for.
so what’s the point for the option seller? Where does he get incentive. Well, the option buyer is getting an option to do something in the future. In order to get such an option, they have to pay for it. The option premium is the amount the contract trades for. It’s what the buyer pays the seller in exchange for the option in the future.
also important: there are different styles of options. For every stock I’ve come across they have been American style options. That means that you can exercise your right to buy or sell at any point between now and the expiry date. In most instances it’s more advantageous to sell the option for its then market value than exercise early, but there are situations where this is not the case. a European style option is one in which you can’t exercise the option before the expiry date
Another thing I mentioned:
A covered call: this is when you sell an option on a stock you own 100 shares of (or however many option contracts you write). so let’s say I own 100 shares of a stock that goes for 50 per share. I write 1 3-month call option on this stock with a strike price of 55. For this, I get 300 dollars. So let’s look at the situations again and let’s assume it’s a European option for simplicity
1. the stock is less than 50 after 3 months. Let’s say 40 per share
Your value is 4,000 dollars from your 100 shares and 300 dollars from the call you sold that has now expired out of the money (in the money, at the money, and out of the money are terms used to describe the stock price and strike prices relationship. If a stocks price is lower than a call strike price then the call is out of the money)
2. the stock is between 50 and 55 after 3 months. Let’s call it 53.
the option still expires out of the money, but you now have a gain on your stock position and you get the call premium
5300+300=5600
3. The stock is higher than 55
now the option is in the money and the option holder will exercise his right to buy the stock for cheaper. But you have 100 shares in your account, so you can hand those over for 5,500 (the strike price times the 100 stock)
mathematically let’s look at it as if you aren’t just handing shares over. Let’s say the stock is 100 per share. Your payoff is
100*(100)= 10,000 for the stock you own
100*(55-100)= -4,500 you owe on the call option (you have to buy 100 shares at 100 and can only sell them at 55. You lose 45 per share you sell)
300 from the call premium
5,800 is your payoff here
And that would be the payoff if the stock was 1,000. The math shakes out the same.
What a covered call is doing is capping your upside on a position in exchange for a premium. If I hadn’t written the call in thislast scenario I’d have 10,000! And I only have 5,800 and that kind of sucks. But in the other 2 scenarios I was able to beef up my return a bit with the extra premium