They have this, legally, in Amsterdam. But that's a different story.
We’ve just hung up from a very interesting monthly phone call with our personal psychic, Madame Enigmatia. She told us that, by the time we have our next phone call 30 days from now, the price of our most beloved healing crystal company’s stock will increase by no less than 10%. The tea leaves didn’t tell her how long the price would stay that high, but its hazy aura suggests it won’t last forever.
So what are we supposed to do with this information? Well, one idea is to purchase a one-touch option contract. A “one-touch option” is a binary option that pays us a premium if a security hits a certain strike price before the option expires.
So...let’s say the current price of Mind Minerals stock is $15.00 per share, and according to Madame Enigmata, it should hit at least $16.50 within the next 30 days. So we buy a one-touch option which basically says just that: we expect the price to hit $16.50 within the next 30 days. We pay $30 for the option, which will pay a premium of $50. If Madame Enigmata’s prediction is correct, we’ll make a profit of $20 (the amount of the premium minus the price of the option). If she’s wrong, we’ll be out $30…and we’ll be in the market for a new psychic.
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.
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