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Unformatted text preview: hares of a stock at a strike
price during some period of time. For example, suppose Martin buys a put option to sell
100 shares of IBM stock at $130 during the
next month. If the share price rises above
$130, Martin will not exercise his put option.
He will simply tear it up and sell the stock for
more than $130. On the other hand, if the
price drops below $130, then he will exercise
his option to sell the stock for $130 a share.
Who buys put options? People who think
the price of the stock is going to decline.
Who sells put options? Obviously, the
people who think the price of the stock is
going to rise. Why not sell a put option for,
say, $20, if you believe that the price of the
stock is going to rise and the buyer of the put
option is not going to exercise the option? QUESTION: I’ve heard some people talk about getting part of their pay or a
bonus in the form of stock options. I’ve
heard that some people make a lot of
money through stock options. What are
ANSWER: A stock option gives an
employee the right to buy a specific number of shares of stock at a price specified
by the employer. The “price” specified by
the employer is often the current market
price of the stock when the stock option is
issued. The hope for the employee is that
the market price will rise over time. For
example, if the stock option specifies the
price of $10 a share, the employee has the
right to buy the stock at $10. Now suppose time passes and the market price of
the stock rises to $40. What can the
employee do now? He or she can buy the
stock for $10 a share and then turn
around and sell it for $40 a share. 454 Chapter 16 Stocks and Bonds 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 455 How You Can Use Call and
Suppose you think a certain stock is going
to rise in price during the next few months.
Currently, the stock sells for $250 a share.
You don’t have enough money to buy many
shares of stock, but you would like to benefit from what you expect will be a rise in the
price of the stock. What can...
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- Winter '14