It sounds like a bad translation of a manga title. But it actually refers to a type of derivatives strategy.
The structure involves buying and selling multiple options for the same underlying asset, possibly using multiple strike prices and expirations. Each part of the strategy is known as a "leg." The goal is to hedge a main bet, or to take advantage of a specific situation.
Examples of these multi-leg situations include butterflies, strangles, and straddles (again, sounds like we've dipped into one of the more adult-themed manga titles here).
Let's take a straddle as an example. It consists of purchasing a put and a call for the same underlying asset. The strike prices and the expirations are both the same as well.
The call represents one leg of the straddle. The put provides the other. A call is a bet that the price of the underlying asset will go up and a put is a bet that the price will go down.
In a straddle, the investor wins no matter which direction the asset moves, as long as it moves far enough to make up the cost of buying the put and the call. It represents a bet on volatility in general. In other words, it's not a bet about which way an asset will move. It's a bet on how far.
The investor thinks it will rise or fall by a large amount, and has set up a multi-legged strategy to take advantage of this projected move.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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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...
The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.