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This is essentially true, though the pricing is quite a bit more complex (implied volatility is important in pricing and that can swing wildly). The tl;dr is i
by jonknee 11y ago
This is essentially true, though the pricing is quite a bit more complex (implied volatility is important in pricing and that can swing wildly).
The tl;dr is it's a way to be short a stock with more limited risk, but with the added variable of having to be right on timing.
- will_pseudonym 11y agoIndeed. it was an Explain Like I'm Five explanation. I have learned far more than I've ever cared to learn about pricing options. Actuaries get paid well in part because the exams are difficult. :) Also, the timing is only applicable to European options which expire on a specific date. American options have no expiration date!
- chollida1 11y ago> Also, the timing is only applicable to European options which expire on a specific date. American options have no expiration date! Umm, American options still have an expiry date. They can be called earlier than their expiration date, though unless there is a dividend to be paid, its never advantageous to do so. But American options absolutely have an expiration date. They wouldn't make sense otherwise. I mean at price would you sell someone a put or a call if they could wait forever to exercise it? No matter what implied vol you put on the underlying, you would still have to price it at infinity wouldn't you?
- will_pseudonym 11y agoMy bad! Sorry about that, my brain wasn't working well yesterday... :)