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And since a put is an agreement to sell at a certain price, how can you even sell such an agreement if it’s value has skyrocketed beyond the value of the underl
by bawana 7y ago
And since a put is an agreement to sell at a certain price, how can you even sell such an agreement if it’s value has skyrocketed beyond the value of the underlying stock? Certainly the counter party would like to buy the put and let it expire (so they don’t have to pay 620 for a stock trading at 400) but how can the value of the put exceed 620-400? If I paid so much more for a put I would lose the amount that exceeds 620-400 (the amount I would gain)
- Sowas 7y agoImagine it as a bet with a friend. You: "hey, I got this item worth 10 but I believe it will go down in the next five days." Friend: "no way." "want to bet? You will buy it from me for 10 whenever I want to sell it." "nah." "I will give you 2 to keep right now!" "alright." Your friend has no say when or if you sell. He got paid and hopes you are wrong. Your friend will obviously not agree to pay 10 for an item that is already only worth 5. And yes if the item only goes down to 9 you lost 1 on the bet.
- manigandham 7y agoOptions are worth an intrinsic value (the current stock price vs the strike price of the contract) and an extrinsic value (the implied volatility of the stock). Large or sudden moves increase the volatility greatly which can result in the extrinsic value being multiples more than the intrinsic, and this is what leads to the wild profit capability of options. At the same time, without those moves, or the lack of any umoves, that value can also rapidly decrease and leads to those options being quickly worthless.