The elevator to your 11th floor apartment is broken. You asked the super how you're supposed to get to your place. He suggests what he calls "the ladder option." (You immediately start googling rental options in your neighborhood.)
Actually, this term has to do with the options market. A normal option grants its holder the right, but not the obligation, to buy or sell some underlying asset (like a stock or a commodity) at a set price during a pre-set time period. The pre-set price is known as the strike price. Traditional, vanilla options have a single strike price.
So you might hold an option to buy 100 barrels of oil at $75 a barrel, with the option expiring in May. The $75 represents the one and only stock price for that option.
In contrast, a ladder option has a series of strike prices. Like a ladder, it has numerous rungs, leading up or down (depending on whether you have a call or a put, betting either that the price of the underlying asset would go up or down).
If you buy a ladder option, you get some profit if the first strike price level is meant, and then additional profit with each additional level reached.
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Finance: What are stock options in 90 se...0 Views
Finance allah shmoop what are stock options in ninety seconds
or less Here's a stock ibm not the tech company
This one makes an anti constipation drug It's trading at
one hundred eighty bucks a share Okay so here's an
option of buy a share of ibm anytime in roughly
the next three months For one hundred ninety dollars a
share it's called a call option If you really believe
the ibm will go to say two hundred dollars a
share in the next three months well you'd be what's
called ten dollars in the money then or then have
a stock option or call option with a strike price
of one hundred ninety dollars which would then have intrinsic
value of ten bucks a share On the other end
of the buy sell desk is the gal willing to
sell you that call option for three bucks Three bucks
a premium So gut check time Would you pay three
dollars for the right to buy a share if ibm
for ten dollars higher than where the stock's trading now
today Meaning that to break even in the next three
months the stock has to trade all the way up
from one hundred eighty dollars a share to one hundred
ninety three dollars a share jobs for you to get
your money back but it goes to two hundred two
share Well if you sell that option you'll have invested
three bucks a share for a net return of seven
bucks in just three months or less And yes we're
ignoring commissions and taxes here because well in problems like
this or just a in the book but three dollars
into seven only three months Yeah that's a great score
You'd have more than doubled your money And on an
annualized return basis that's over a nine hundred percent dish
return really good score but with a much more likely
case that you spend three bucks to buy the option
and it expires totally worthless And then you've lost your
entire investment in that option So that's a call option
It's evil twin is a put option So whereas a
call options the rightto by a security to set price
by a certain set date a put option is the
right to sell that option We'd go into more detail
here but we're promised ninety seconds
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...
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...
The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.