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Re: how does that work?

Posted by WinthorpeIII on December 21, 2006 at 13:54:57

In Reply to: how does that work? posted by dave c on December 21, 2006 at 13:08:12:

He put the money into "put" options, which gives the buyer the opportunity to sell the stock at a given price. A put option is a bet that the stock will go down, just as a call option is a bet that the stock will go up. The put option is worth something when the stock goes below the strike price of the option (at expiration). A normal call option gives you the opportunity to buy the stock at a certain price, so it is worth something when the stock is above the strike price. Part of the option value is the "time value" of the option.

For example:

At the close of 12/21/06 AMD Stock at $20.95. If I'm betting the stock is going to go down, I could buy an option contract which would allow me to sell the stock to someone at $19. The Jan 19 expiration date of that put option (AMDMT.X) is asking 0.35. If the stock goes below $19 before Jan 19, the option will be worth something. If not, the option contract will expire as worthless. If there is a significant move of the stock, it can offer a lot of leverage to your money. Volatile stocks, like Google, have very expensive time component premiums. For example:

goog at $456.20

A June 450 call option has a current inherent value of $6.20, but a current asking price of $49.50 -- the difference being the asking price for the time value of the option. In June, the value of the call option will be the amount the stock is over the strike price. If the stock is at $500 in June, the option will be worth $50 when it expires.

In the Bond movie, the bad guy put the money into "put" options which would be worthless if they were "out of the money" and the stock did not move.

• Put option   (Open in New Window)

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