Front Fee
Categories: Trading, Investing, Mutual Funds
We love options, but do you know what we love even more than options? Options on options.
When our friend buys two shirts for a party, we buy four, so we can choose our outfit based on what he wears. When we plan a vacation, we book two fully refundable trips just in case the weather is bad in one place and we decide to go to the other. And when we invest, you can bet your beard that we’re all about the compound options.
Compound options are great because they are, quite literally, options on options. In other words, we’re buying the right—but not the obligation—to buy or sell stock at a later date based on predetermined parameters. Options, baby. And all we have to do to get started is decide which shares we want and how many, select our expiration dates and strike prices, and pay the front fee. The front fee is basically the premium we pay for the right—nay, the joy—of stepping into the compound option world.
Unfortunately, that joyful little front fee is probably not the only fee we’ll pay here. It really only covers the first half of our compound option: the “right to do this” part. The second part, the actual exercising of the option, also involves a premium, and that’s called (surprise!) the back fee. The moral of the story is that compound options can be a little expensive (kind of like buying four shirts for one party), but they do give us more leverage with our investments. And, of course, they give us options.
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Finance: What is Alligator Spread?28 Views
finance a la shmoop what is an alligator spread.... no it's not that
an alligator eats the spread from profitable trades to just a break-even [Alligator eats spread]
trade or worse the alligator is essentially the brokers commission or
spread however it gets paid which makes a given trade unprofitable like a trader
bought a stock for $118.23 cents a share thinking she'd sell it the next day for
$120 even and make a quick buck 77 but then the Commission comes in at a buck
80 making that particular trade unprofitable well in the real world that [Spread or gross gain from trade pie chart]
term applies to the options market place where Commission's or spreads can be
massive as a percentage of the entity being traded that is a bid-ask spread on
a volatile tech stock might be for a stock trading at 40 bucks a share today
for about ten weeks of duration a put on it at $35 might be priced as a massive
$2 a share meaning that in order to make money buying a put option the stock [Put option stock graph]
would have to decline by more than seven dollars in the next ten weeks that is if
an investor wanted to buy the put they'd be charged two bucks and if they wanted [Person takes away 2 bucks]
to sell the put all they could get for it would be like a dollar 20... 80 cent
spread there if you were trading on the puts and the calls got that then think
about the put itself well in order to make money buying a put option the stock
would have to decline by more than seven dollars in the next ten weeks so yeah it [Decline over more than 7 dollars shown on graph]
gets pretty brutal, careful for those options so let's say a few weeks go
along and the price of the put that they paid two dollars for now they want to
sell it because the stocks gone down in the right direction well at dollar 20
now all that gets a dollar eighty the spread ate them up like alligator ate em [Alligator lurking]
gobbled up all the profits so yeah when you combine multiple sets of options
like the above one you can imagine the alligator ends up being painted as well
very toothy [Man painting and crocodile appears scaring him away]