PUT OPTIONS TRADING FOR BEGINNERS IN 10 MIN.
– CALL AND PUT OPTIONS EXPLAINED Hello and welcome once again! Our topic for
this video is understanding “Put Options”. Remember you can always go back to MBABULLSHIT.COM.
In order to understand put options, I’d like to first start with a story. Let’s
stay there was a man who owns a share of stock worth $100. He likes to keep his stock for
now. But maybe in the future, he’d like to sell his stock for at least $100. Of course,
if it’s at least $100 now why would he want to sell it for anything less?
However, he’s afraid that in the future the price of his stock might go below $100
–$50, $20, or even zero. Suddenly he remembers that he knows a rich lady and that he can
pay her $1 to make a contract with her in order to convince her to sign a contract with
him. In this contract, she says she will guarantee to buy his stock for $100 anytime in the next
5 years, if she wants. Even if the stock price goes down to zero or $50 or $20… she guarantees
that she will buy it from him for $100. Let’s pretend that this man is allowed to
sell this contract to anybody else who can use it. Maybe this guy changes his mind and
he says, “You know what, I’m sure that I do not want to sell this stock in the future.”
Maybe this guy over here, me, also has the same stock and I think I’d also like to
sell this stock for $100 in the future. What happens here is this guy can sell the contract
with the lady to me so that I can use it instead. Let’s say that this guy is allowed to sell
this contract to anyone else who can use it. Can you guess what this contract is called?
It’s easy. It’s called the “option contract”. This man now has the option or the choice
to sell his stock at $100 to her for the next 5 years. Specifically, it’s called a “Put
Option”. Meaning, this man is allowed to sell at a given price for a certain time,
which we know in this case is 5 years. The lady here is the “issuer” of the option.
She bears the risk but she earns $1. She might have the same contract with many, many other
guys like this and earn lots of dollars for taking this with many people.
Very important: Do not get confused with the buying and selling of this option contract,
versus the buying and selling of the stock which possibly can happen in the future.
Other things to remember, when I said that the man might “use” the option contract
to buy or sell the stock (in this case to sell the stock; to buy the stock is in another
case – call option – explained in another video), in MBABULLSHIT language, we usually
say the man “exercises” the option. So if an MBABULSHITTER says, “Oh! I exercise
my option,” he’s just bullshitting. What he really just needs to say is he used that
option. If the option is good for 5 years, then the
date after 5 years is called the “expiration” date. It’s like a carton of milk or a stick
of cheese, which has an expiration date. We can say that the option expired in 5 years.
Very important: I said that this guy can exercise the option any time in 5 years. In Europe,
it’s a special case. In Europe, he will only be able to use the option on the exact
expiration date itself. Another thing to remember is that, we kept
on talking about the man who has the right to sell the stock for $100 exactly. In MBABULLSHIT
language, we call this $100 the “strike” price. The $1 he paid the lady is simply the
“option” price. Don’t confuse the two. Lastly, remember that in real life, the man
and the woman probably will not deal directly with each other. Instead, options are traded
in what we call “options exchange”. Keep that in mind.
Now that you understand “Put Options”, you’re ready for my next easy video on “Call
Options” which is an option to buy a share of stock. If you haven’t watched that yet,
you may watch it. If you’ve watched both videos, you’re ready for my next easy video
“How to Value Options at Expiration Date,” which answers the question “How much is
an option worth at an expiration date?” You can watch that at MBABULLSHIT.COM.
Remember to share and like us. On Twitter we’re known as @MBABULLSHIT. On Facebook,
we are facebook.com/mbabullshit. You can simply forward our free YouTube videos! Have a great
day and goodbye!