lecture 10, soc 149

lecture 10, soc 149 - Madoffs investment scheme (we...

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Madoff’s investment scheme (we think!?!) Puts and Calls How do they work? Put: This is a contract which if you buy it, you have the right but not the obligation to force the sale of a stock the seller (or writer of the put contract) owns or promises to own at a strike price (a specifc price per share) at or before a specific date (expiration date)
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How Madoff wanted to make money on puts A put makes money for its owner if the strike price is higher than the current price on the market Thus you (owner of put) force the sale, at the higher strike price, and your profit is the difference between the strike price and the lower market price This will occur is the market goes down from the day you buy the put contract
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How Madoff wanted to make money on Calls A call is a right to buy a stock at a trigger price by or before an expiration date A Call makes money for the owner of the call when the trigger price is lower than the market price So you force the writer of the call (owner of the stock) to sell it to you at the trigger price, which is lower than the market price Your profit is made by you selling the stock at the higher current market price This happens when the market goes up from the day you buy the call contract
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Puts and Calls: Buying and selling So you buy a put when you think the market will drop a certain amount by a certain date Your trigger price is above that low point you predict the market will hit You buy a call when you think the market
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This note was uploaded on 10/16/2010 for the course SOC 149 taught by Professor Parker during the Spring '10 term at UC Riverside.

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lecture 10, soc 149 - Madoffs investment scheme (we...

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