A “gut spread” might sound like a good name for what happens when we habitually eat too many pizza rolls, but in the financial world, it means something very, very different.
A “gut spread” is a type of option spread, and in this scenario, our options are called “guts” because our put and call options are both in-the-money: our call option’s strike price is below market value and our put option’s strike price is above market value. Being in-the-money also means that these options are a little more expensive than their out-of-the-money kin; they have more intrinsic value, which is also why they’re referred to as “guts.” They’re hearty. If we buy both puts and calls, it’s a long gut spread; if we sell both puts and calls, it’s a short gut spread.
Why? Let’s say there’s a new ocean clean-up company on the scene that we’ve been looking at. They’ve got a unique business model for removing plastic from the water that involves ginormous, floating Roomba-looking things, and we’re not sure whether they’re going to be successful or not. In this situation, we might go with a long gut spread: we’re not sure whether the price of their stock will go up or down, but we’re sure it’s going to do one of the two in a big way, and we’re gonna make some money on it.
On the other hand, let’s consider Taxidonculous, a company that makes tax accounting software. Their stock has been humming along with no major fluctuations for a while now, and we expect that trend to continue. In this case, we might go with a short gut spread: we’ll get paid hefty premiums up front, since our options are in-the-money, and we’ll also probably (hopefully) avoid losing money since the stock price is relatively stable.
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Finance: What are stock options in 90 se...0 Views
Finance allah shmoop what are stock options in ninety seconds
or less Here's a stock ibm not the tech company
This one makes an anti constipation drug It's trading at
one hundred eighty bucks a share Okay so here's an
option of buy a share of ibm anytime in roughly
the next three months For one hundred ninety dollars a
share it's called a call option If you really believe
the ibm will go to say two hundred dollars a
share in the next three months well you'd be what's
called ten dollars in the money then or then have
a stock option or call option with a strike price
of one hundred ninety dollars which would then have intrinsic
value of ten bucks a share On the other end
of the buy sell desk is the gal willing to
sell you that call option for three bucks Three bucks
a premium So gut check time Would you pay three
dollars for the right to buy a share if ibm
for ten dollars higher than where the stock's trading now
today Meaning that to break even in the next three
months the stock has to trade all the way up
from one hundred eighty dollars a share to one hundred
ninety three dollars a share jobs for you to get
your money back but it goes to two hundred two
share Well if you sell that option you'll have invested
three bucks a share for a net return of seven
bucks in just three months or less And yes we're
ignoring commissions and taxes here because well in problems like
this or just a in the book but three dollars
into seven only three months Yeah that's a great score
You'd have more than doubled your money And on an
annualized return basis that's over a nine hundred percent dish
return really good score but with a much more likely
case that you spend three bucks to buy the option
and it expires totally worthless And then you've lost your
entire investment in that option So that's a call option
It's evil twin is a put option So whereas a
call options the rightto by a security to set price
by a certain set date a put option is the
right to sell that option We'd go into more detail
here but we're promised ninety seconds
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