ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos


International Videos 92 videos

Finance: What is the Advance Decline Ratio?
14 Views

What is the Advance Decline Ratio? The advance decline ratio is used to determine how the market performed on a given day. It does this by comparin...

Finance: What is a strong dollar?
3 Views

A strong dollar is one that has earned trust on an international scale. It reflects a reliable currency...at least, more reliable than that of othe...

Finance: What is the Dow Jones Industrial Average?
2710 Views

What is the Dow Jones Industrial Average? The Dow Jones Industrial Average is usually just called the Dow. It’s an average of 30 of the most well...

See All

Finance: What is a naked option/position? 7 Views


Share It!


Description:

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 the price changes. We suppose you could sell it naked, though...

Language:
English Language

Transcript

00:00

Finance a la shmoop what is a naked option or naked option position? alright

00:09

warning you're going to be disappointed in this video it's not nearly as hot as [Censored man jumps into lake]

00:13

you probably hope naked options are just options that you sell or buy without

00:18

having enough of the underlying security to cover your if the price changes in

00:24

the wrong direction all right well they're an investment

00:26

that stands on their own but with extreme amounts of risk.....You invest [Man discussing investment in a lake]

00:34

$10,000 in coca-cola stock at 40 bucks a share buying 250 shares the stock goes

00:39

up $2 in a year or 5% not a bad score and you've made a whopping five percent on

00:45

your money or about five hundred bucks you bought the stock not the option and

00:50

remember when you own the stock you can own it forever there's no clock ticking [Clock ticking by]

00:53

in the background like there is with an option okay but let's say you had spent

00:57

that same 10 grand worth of naked coca-cola call options on options with a

01:02

strike price of 42.50 expiring in four months well the stock remains at 42.50

01:08

the whole time doesn't budge well guess what you've lost all of your money [Man with empty jean pockets]

01:13

had the stock under $45 however that 10 grand invested in those call options

01:18

which bought you exposure to some 20,000 shares would have made you something

01:22

like 250 a share that's of in-the-money value on those options times 20,000

01:27

shares or 50 grand yeah way more than your boring experience of just owning

01:33

the stock and making a whopping 500 bucks but you'll also risk losing

01:37

everything and this kind of foot's with whole notion of risk and reward being [Man in between reward and risk]

01:42

married in some unholy alliance where they kind of wrestle and yell at each

01:46

other all the time right so you took a lot of risk in buying

01:49

call options with nothing behind them you bought em naked

01:52

you could have made a fortune but you didn't because he played it safe and

01:55

bought the stock well in reality professional investors rarely just buy

01:59

naked options alone because they are so risky and so volatile but every now and [Ball spinning on roulette wheel]

02:05

then somebody bets the ranch on 22 black it comes up they make 36 times their

02:10

money in a week and everyone asked them for the best way to angle their thumb

02:15

when they're trying to flip a head on a quarter and we actually have a whole

02:18

video on that you should watch it it's kind of depressing...

Related Videos

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...