There are times to sit back quietly and take it all in. And there are times, as will.i.am says, to scream and shout and let it all out. If we’re holding onto a type of exotic option known as a “shout option,” chances are good that we should be keeping our eyes peeled for those shouty times.
Why? Because shouting = profits. Allow us to explain.
Options are basically the right—but not the obligation—to buy or sell a security at a specific price and within a specific timeframe. When we call options “exotic,” it means they’ve got some sort of fancy twist to them (and they probably have a higher premium). When we call exotic options “shout options,” it means we can lock in certain profits at certain times during the life of the option, all by “shouting” at our broker whenever the strike price goes high on a call option or low on a put option. We’ll pay more for the privilege, but we might also end up making more money.
Googly Eyes, Inc. stock is currently trading at $24.50 per share, and we buy a call shout option with a strike price of $30. If Googly Eyes stock suddenly shoots up to $40 per share, we can “shout” at our broker, and she can lock in that $10 profit for us. Even if the price goes back down to $31.25, we’ve still locked in our $10. That’s pretty sweet, but this is even sweeter: if the stock price goes up to $45, we’re not just stuck with our measly ten bucks, oh no. We can continue to make money above and beyond the profits we’ve already secured. So, in this example, we’ve locked in $10 in profits, and now it looks like we’re going to make an additional $5. For put shout options, this whole process would just operate in reverse: the lower the stock price goes, the more profit we can potentially secure.
Shout options can be a really good time, but there are a few things we should keep in mind before we plunge in head-first. As mentioned, the premiums for exotic options are always more expensive than they are for “normal” options. That’s because they’re fancy, and fancy stuff...can get pricey. Also, the more volatile the security in question is, the more that premium can cost, since high volatility could mean there’s a lot more potential for profit. And third, because options like these are so complex, we’re not going to find them on major exchanges like the NYSE. They are OTC only. But if we’re looking to bring the action to our investment portfolio in a big way, it might be worth giving shout options a…shout.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
Up Next
A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...