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Finance: What Is a Call Option? 25 Views
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Description:
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 time. Calls are bought when investors think a stock will increase in value, because they are able to buy at a price that’s higher than what the stock is actually currently worth.
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Transcript
- 00:00
finance a la shmoop. what is a call option? option? option, where are you? okay
- 00:09
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
- 00:14
is the right to call or buy a security. the concept is easy the math is hard.
- 00:24
you think Coca Cola's poised for a breakout as they go into the new low
- 00:30
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
Full Transcript
- 00:35
call option for $1. well that call option buys you the right
- 00:39
to then buy coke stock at 55 bucks a share anytime you want in the next
- 00:44
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
- 00:48
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
- 00:53
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
- 00:59
so you buy the stock and you're all in now for fifty five dollars plus one or
- 01:04
fifty six bucks a share and your total value is now fifty eight bucks. well you
- 01:10
could turn around today and sell the bundle that moment, and you'll have
- 01:13
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
- 01:18
stock not skyrocketed so quickly well you would have lost everything. still you
- 01:23
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
- 01:27
options. as for Coke flavor zero turned out to be nothing more than canned water.
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