Hello and welcome once again to MBABULLSHIT.COM. Our topic for this video is “Understanding

Call Options”. Remember that you can always go back to MBABULLSHIT.COM. Let’s get down to it!

In order to first understand “call options”, I’d like to start with a story. Let’s

say there was a man who was interested in a share of stock. The stock is now worth $100

in the market and he might want to buy it in the next 5 years for also $100. However,

he’s afraid that it might be more expensive in the future and might cost him more than

$100. So what should he do? Suddenly he remembers that he knows a rich

lady and that he can pay her $1 to make a contract with her. In the contract, she guarantees

that she will sell him the stock for only $100 any time in the next 5 years if she wants.

He’s not forced to do it, but he can do it if he wants to do it. They write that agreement

down in this contract. She guarantees that she will sell him the stock for only $100

even if the stock price goes up to $200 or $300.

Let’s say that this man is allowed to sell this contract to somebody else who can use

it. Maybe he changes his mind and he doesn’t want this contract anymore. He doesn’t need

this contract anymore. Maybe he can sell it to somebody else like to me.

Question: What is this contract now called? It is called an “Option” contract.

This man now has the choice, the right, or the option to buy this stock from her for

the next 5 years for $100 even if the price goes up. Specifically, this contract is called

a “call option”. It is the man’s option to buy a share of stock at a give price ($100)

for a certain amount of time. In our example, it’s 5 years. Now, the lady here is called

the “issuer” of the option. She earns $1 because the guy paid her $1 in order to

motivate her to agree to the contract; but she also bears the risk in exchange for the

$1. This is very important. Don’t be confused

with the buying and selling of the option contract, which was what happened right now,

versus the buying and selling of the stock, which is possible in the future if the man

wants to use the contract. Don’t confuse those 2 things.

Another thing, when I said that the man might use the option contract to buy a share of

stock, in MBABULLSHIT language, we say “exercise” the option. So if an MBABULSHITTER says, “Oh!

I exercise my option!” he sounds so intelligent or whatever with all that bullshit. He’s

just saying that he used the option contract to buy a share of stock, or to sell it, depending

on what kind of option it is. More on that later. If you use or take advantage of the

option contract, then that means you exercised the option contract.

If the option is good for 5 years, then we can say that the date at the end of the 5

years is called the “expiration date”. It’s a the carton of milk, or food that

expires. So we say that the option expires in 5 years.

Very important. I said that this man can use or can exercise the option any time in 5 years,

but actually in Europe, it’s a special case. In Europe, you cannot use it any time in the

next 5 years or before its expiration date. In Europe, you must exercise or use the option

only on the expiration date itself. Be very clear about that.

The other thing is we kept on talking about $100 that the man might buy the stock from

the lady. This $100 is called the “strike” price in MBABULLSHIT language. Don’t’

confuse that with “option” price, which is simply the $1 that he paid the lady in

order for the lady to agree to the option contract with him.

Lastly, take note that in real life, the man and the woman (the old lady) do not deal directly.

Instead, options are traded in what we call the “options exchange”. Remember that.

Now that you understand that, you’re ready for our next video on “Put Options”. If

you haven’t watched that video, please watch it. If you’ve already watched both videos

– Put Options and Call Options (this video) – then you’re ready for the next easy

video “Valuing Options at Expiration Date,” which answers the question “How much is

an option worth at Expiration Date?” You can watch that at MBABULLSHIT.COM.

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