Put Options Trading for Beginners in 10 min. - Call and Put Options Explained

Uploaded by MBAbullshitDotCom on 20.08.2010

Hello and welcome once again! Our topic for this video is understanding “Put Options”.
Remember you can always go back to MBABULLSHIT.COM. In order to understand put options, I’d
like to first start with a story. Let’s stay there was a man who owns a share of stock
worth $100. He likes to keep his stock for now. But maybe in the future, he’d like
to sell his stock for at least $100. Of course, if it’s at least $100 now why would he want
to sell it for anything less? However, he’s afraid that in the future
the price of his stock might go below $100 –$50, $20, or even zero. Suddenly he remembers
that he knows a rich lady and that he can pay her $1 to make a contract with her in
order to convince her to sign a contract with him. In this contract, she says she will guarantee
to buy his stock for $100 anytime in the next 5 years, if she wants. Even if the stock price
goes down to zero or $50 or $20… she guarantees that she will buy it from him for $100.
Let’s pretend that this man is allowed to sell this contract to anybody else who can
use it. Maybe this guy changes his mind and he says, “You know what, I’m sure that
I do not want to sell this stock in the future.” Maybe this guy over here, me, also has the
same stock and I think I’d also like to sell this stock for $100 in the future. What
happens here is this guy can sell the contract with the lady to me so that I can use it instead.
Let’s say that this guy is allowed to sell this contract to anyone else who can use it.
Can you guess what this contract is called? It’s easy. It’s called the “option contract”.
This man now has the option or the choice to sell his stock at $100 to her for the next
5 years. Specifically, it’s called a “Put Option”. Meaning, this man is allowed to
sell at a given price for a certain time, which we know in this case is 5 years. The
lady here is the “issuer” of the option. She bears the risk but she earns $1. She might
have the same contract with many, many other guys like this and earn lots of dollars for
taking this with many people. Very important: Do not get confused with the
buying and selling of this option contract, versus the buying and selling of the stock
which possibly can happen in the future. Other things to remember, when I said that
the man might “use” the option contract to buy or sell the stock (in this case to
sell the stock; to buy the stock is in another case – call option – explained in another
video), in MBABULLSHIT language, we usually say the man “exercises” the option. So
if an MBABULSHITTER says, “Oh! I exercise my option,” he’s just bullshitting. What
he really just needs to say is he used that option.
If the option is good for 5 years, then the date after 5 years is called the “expiration”
date. It’s like a carton of milk or a stick of cheese, which has an expiration date. We
can say that the option expired in 5 years. Very important: I said that this guy can exercise
the option any time in 5 years. In Europe, it’s a special case. In Europe, he will
only be able to use the option on the exact expiration date itself.
Another thing to remember is that, we kept on talking about the man who has the right
to sell the stock for $100 exactly. In MBABULLSHIT language, we call this $100 the “strike”
price. The $1 he paid the lady is simply the “option” price. Don’t confuse the two.
Lastly, remember that in real life, the man and the woman probably will not deal directly
with each other. Instead, options are traded in what we call “options exchange”. Keep
that in mind. Now that you understand “Put Options”,
you’re ready for my next easy video on “Call Options” which is an option to buy a share
of stock. If you haven’t watched that yet, you may watch it. If you’ve watched both
videos, you’re ready for my next easy video “How to Value Options at Expiration Date,”
which answers the question “How much is an option worth at an expiration date?”
You can watch that at MBABULLSHIT.COM. Remember to share and like us. On Twitter
we’re known as @MBABULLSHIT. On Facebook, we are facebook.com/mbabullshit. You can simply
forward our free YouTube videos! Have a great day and goodbye!