by TWilliam » Fri 24 Aug 2007, 02:10:17
$this->bbcode_second_pass_quote('seahorse2', 'I')'m not familiar with puts etc. Can someone please explain what exactly is going on?
Ok let's see if I can remember this right.
A
put option is essentially a bet that the value of a particular stock is going to decline at some point in the future.
An
option is a contract that gives the
option holder control of an asset (in this case a specified number of shares),
without actually purchasing it, for an agreed upon period of time, subject to the provision that said holder must liquidate (purchase) those shares at an agreed upon price when the time period expires.
The holder then immediately sells those shares at whatever the current market value is, in the hope that their value will subsequently decline prior to the expiration of the option. When (if) the price falls, the holder then buys the shares back at the reduced value, returning them to whomever they borrowed them from, effectively canceling the option contract and pocketing the difference.
The risk of course lies in the fact that if the stock value has risen, rather than declined by the time the option expires, then the holder will be forced to either buy back the shares at the inflated cost in order to cancel the option, or honor the contract and pay the original lender the price agreed upon.
"It means buckle your seatbelt, Dorothy, because Kansas? Is goin' bye-bye... "