The right to sell a put...on a put.
Huh? How's that work?
Ever hear the expression “a hat on a hat?” Kind of the financial equivalent of that. Puts and calls are the basic vanilla contracts of options trading. Calls give the holder the right (but not the obligation) to buy some underlying asset (like a stock or commodity) at a pre-set price and at a pre-set time in the future. A put represents the opposite: the right (but not the obligation) to sell an underlying asset at a pre-set price and at a pre-set time.
Like putting ice cream on cake, you can stack these options as well. The process creates compound options. A put on a put counts as one of these (along with a call on a put, a put on a call, and a call on a call).
Compound options allow people to get involved in trades where they would otherwise not have the financial wherewithal. To sell an underlying asset (as the put gives the right to do), you need to have that asset in the first place. That can get expensive if you're talking about something like, say, shares of AMZN, which trade at about $1,900 a share. But a put or call option for that stock would be far less expensive. So...a put for a put option on AMZN would be cheaper to obtain, if you plan to exercise your right to sell it.
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Finance: What Is a Call Option?25 Views
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.
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...