Tools - Bond, Stock, Option (part II)
I write bunch of things you probably know already, just because I want to explain Options, if no Options, you can never make money when the market is pointing down.
Option
> Risk: Stock x 10 (means a lot more risky than stock)
> Very simple, there are 2 kinds of Options, Call and Put, and each of them you can either Long (buy) or Short (sell) regardless if you have the money/stock on hand or not.
Call Option:
- A contract which allows you to buy stock in future (expiry day) at certain price (strike)
Example: McDonald now is $42.75, and in order to buy Fantastic at $40 in Jun07, you need to pay $5.25 (MCDFH.X) now.
Reason: the expected stock price of McDonald would be $40+$5.25 = $45.25 in Jun07 now.
Execise: Hold of stock option would only execise if the stock price is higher than the strike price ($40) on expiry day.
Well, you can sell call option even you have no Option in hand!!! but on the expiry day (always the Thur of the 3rd week of the month), you need to buy stock no matter how expensive it is, to cover to the user who really execise the option.
Put Option:
- A contract which allows you to sell stock in future (expiry day) at certain price (strike)
Example: McDonald now is $42.75, and in order to sell Fantastic at $45 in Jun07, you need to pay $3.02 (MCDRI.X) now.
Reason: the expected stock price of McDonald is $45-$3.02 = $41.98 now.
(note! some people expect it will be as high as $45.25, some expect it is as low as $41.98 now. However, its 52 week range is 31.73-43.43, people really like McDonald now...)
Anyway, same for Call Option, one can sell Put Option without Option on hand, but the worse case is if you sell Put Option, and the stock goes really low, you have to use the strike price to buy that stock from Put Option holder no matter how low price it is.
So, normally, unless you have some strategy, you won't single handed sell options.
Well, it's enough for tonight. One last question you would ask, in HK, seems there is no Option market but people always talk about "Warrant", what's the difference between Option and Warrant? check this out at http://en.wikipedia.org/wiki/Warrant_%28finance%29