41 lines
1.5 KiB
Plaintext
41 lines
1.5 KiB
Plaintext
Option Fundamentals • 11
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5/18/2012
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5/20/2013 249 499
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Date/Day Count
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Stock Price
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749 999
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GREEN
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RED
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As soon as the “Buy” button is pushed, the investor gains expo-
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sure to the upside potential of the stock—this is the shaded region la-
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beled “green” in the figure. However, at the same time, the investor
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also must accept exposure to downside risk—this is the shaded region
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labeled “red. ”
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Anyone who has invested in stocks has a visceral understanding of
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stock directionality. We all know the joy of being right as our investment
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soars into the green and we’ve all felt the sting as an investment we own
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falls into the red. We also know that to the extent that we want to gain
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exposure to the upside potential of a stock, we must necessarily simultane-
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ously accept its downside risk.
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Options, like stocks, are directional instruments that come in two
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types. These two types can be defined in directional terms:
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Call option A security that allows an investor exposure to a stock’s
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upside potential (remember, “Call up”)
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Put option A security that allows an investor exposure to a stock’s
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downside potential (remember, “Put down”)
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The fact that options split the directionality of stocks in half—up and
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down—is a great advantage to an investor that we will investigate more in
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a moment.
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Right now, let’s take a look at each of these directional instruments—
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call options and put options—one by one. |