Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 298

and a profit of

$2,200-$400 = $1,800

In this case we could indeed calculate a return on investment which is

($1,800 / $400) x 100% = 450%

Nice going! In case you are wondering why FMJ's premium was $11, here is the breakdown. When Ford fell to $40, those options went $10 in the money ($50 strike price-$40 current price). So they had a $10 intrinsic value. Then with 10 days to go, I estimated a time value of $1 (probably it would be less but let's keep it simple). $10 + $1 = $11. As you can see selling the put options is a better deal than exercising them. You ended up collecting $2,200 rather than $2,000 if you went through the trouble of buying up shares and exercising your options. The extra $200 is the time value that you would have not collected had you exercised the FMJ options. But there is more. By selling the options you only pay one commission charge. Exercising them would have involved three commissions: one to buy the shares, one to sell the shares, and sometimes an additional one to exercise them. Plus this is normally a time-consuming process requiring days to complete. Now you see why most options are settled rather than exercised. It's just too expensive to exercise.

As you can see, all those concepts we learned for call options apply to put options as well. But since put options are rights to sell, they are a bit more difficult to understand than the more straightforward call options. The concepts of underlying stock, strike price, expiration date, intrinsic value, time value, time decay, in/out/at-the-money, and so on apply the same to put options. For example, from the table and the fact

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Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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