Abandonment

finance a la shmoop what is a put option? hot potato hot potato

ow ow! yeah remember that game well nobody wanted the potato, poor thing. the

players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]

of work the same way. a put option is the right or option or choice to sell a

stock or a bond at a given price to someone by a certain end date.

all right example time. you bought netflix stock at the IPO a zillion years

ago at $1 a share. that's you know splits adjusted. all right now it's a hundred

bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in

California that would be a tax of something like almost 40 bucks. well the

stock was a hundred but you keep only something like 60. feels totally unfair.

right so you really don't want to sell your stock but you're nervous about the [graph shown]

next few months that Netflix will crater for a while and go down ten

maybe twenty dollars. longer term though you think it'll hit 300. so this is the

perfect setup to maybe look at buying some put options on Netflix. if the stock

goes down your put options go up. with Netflix volatile but at a hundred bucks

a share ,you look up the price of an $80 strike price put option expiring in

December, and you know that's mid-september now .for five bucks a share

you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]

term life insurance. you pay the five dollars a share in the stock goes down

to 82 by mid December, worst of all worlds. well not only did you lose the $5

a share but your stock has lost $18 in value. but had Netflix really cratered

and gone to say $60 a share well you would have exercised your put and sold

your shares at 80 bucks. well those put options you paid $5 for

would be been worth 15 bucks a share. in buying that put option you've [equation shown]

guaranteed that your loss will be no more than a $75 value for your Netflix

position at least for that time period and ignoring taxes. well remember that

options expire after December whatever like the third Friday of the month it's

usually when options expire, you then have no protection and your shares float

along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]

raunchy. yeah well that's naked put options.

that's what they really are people.