Back Months

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.