You want to speculate on options, but you don’t ever want to take physical delivery of commodities or own the underlying stock tied to the derivative contract.
You can trade cash-based stock options, which are settled in cash payment.
They enable you to capture the gains out of stock movements, but never require you to purchase the stock when the options expire.
Let’s say you buy a cash-based option on GOOG stock that has a strike price of $1,200.
The stock-option increases in value to $1,250. Rather than buy the stock at expiration, which would require ownership of 100 shares (and cost $120,000 based on the strike price), you would capture the difference, or net value of the deal.
You would, at 100 shares, be looking at a value of $125,000. The difference between the value and the strike price would be ($125,000 minus $120,000 = $5,000).
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
A naked option isn't as risqueé as it sounds...it's just an option you sell without having enough of the underlying security to cover your butt if...
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...