The news created an instant windfall for the trader, as these options,
which were bought for $7,500, became worth as much as $250,000.
Option trade: $7500/15 = 500*100 control shares = 500000 * 6 = 300,000 USD (from 30 to 36)
Option trade
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.
Still confused? The idea behind an option is present in many
everyday situations. Say, for example, that you discover a house that
you'd love to purchase. Unfortunately, you won't have the cash to buy it
for another three months. You talk to the owner and negotiate a deal
that gives you an option to buy the house in three months for a price of
$200,000. The owner agrees, but for this option, you pay a price of
$3,000.
Now, consider two theoretical situations that might arise:
-
It's discovered that the house is actually the true birthplace of
Elvis! As a result, the market value of the house skyrockets to $1
million. Because the owner sold you the option, he is obligated to sell
you the house for $200,000. In the end, you stand to make a profit of
$797,000 ($1 million - $200,000 - $3,000).
-
While touring
the house, you discover not only that the walls are chock-full of
asbestos, but also that the ghost of Henry VII haunts the master
bedroom; furthermore, a family of super-intelligent rats have built a
fortress in the basement. Though you originally thought you had found
the house of your dreams, you now consider it worthless. On the upside,
because you bought an option, you are under no obligation to go through
with the sale. Of course, you still lose the $3,000 price of the option.
To my opinion it is risky but it is worthy.
