ShmoopTube

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

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

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

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

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the wrong direction all right well they're an investment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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call options with nothing behind them you bought em naked

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

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bought the stock well in reality professional investors rarely just buy

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

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

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

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

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

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