You've identified a sure-fire, can't-miss, once-in-a-lifetime stock investment. The only issue is getting you hands on a enough money to make the bet worth your while. How to get some additional funds to buy the stock? It's called margin.
Investors can set up a margin account with a brokerage firm, which allows them to borrow up to 50% of a stock purchase price to make the transaction. From the account holder's point of view, this money just magically appears. But it has to come from somewhere. On the other side of the transaction, the brokerage usually gets this money from a bank...they are borrowing the money, just like you are borrowing it from them.
Known as call money, this is a very short-term loan that banks make to brokerage firms. The rates are not available to the general public, and are somewhat risky for the brokerage, as the bank could call in the loan at any time. If that happens, it would force the brokerage firm to come up with the money to pay it back, or force their client to pay it back early (which would probably not go over well).
So let's say Can't Lose Inc. wants to purchase 100,000 shares of a hot stock priced at $30 per share on their margin account. They promise to pay the money back within 30 days after they have bought and sold the stock. The brokerage firm Play Today Pay Tomorrow does not have that kind of cash available to loan out, so they go to a bank who gives them a call money rate of 6%.
Can't Lose buys the stock on margin at $30 a share and sells it for $35 a share 20 days later. This gives them plenty of time to pay back their margin loan and pocket the $5 a share profit. Play Today is also happy because they can pay back their call money loan to the bank within the 30 days. If Can't Lose could only sell their shares at $25 a share, they would have to make up the difference to pay back the brokerage firm.
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Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
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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 t...