Toby Bordelon has the following options: short June 2022 $90 puts on Zoom Video Communications.
I am unclear how to read the meaning of this. Thank you.
Per investopedia –
https://www.investopedia.com/terms/s/short-put.asp#:~:text=A….
The idea behind the short put is to profit from an increase in the stock’s price by collecting the premium associated with a sale in a short put.
Generally speaking this should mean that he is bullish on the company, or at least was when he started the option position.
Vicki
long ZM
When you are short a put option, it means you sold someone else the right to sell you a stock at a specific price point at or before a certain date.
This specific position means that on or before the June expiration of his position, that someone else can click a mouse button and force Toby to buy Zoom Video Communications stock for $90 a share. Put options typically come in 100 share contracts, so basically, Toby promised to have $9,000 available for every contract he sold in case that person wants to exercise the option to sell him that stock.
When he set up that position, he got paid a premium for selling that put. That premium depends on things like how long before the put’s expiration date he sold it, the price Zoom Video Communications’ stock was trading at when he sold it, and how volatile the stock appeared to be at that time. Let’s say for the sake of argument that he got $8 per share — or $800 per contract — for selling that put.
If the put expires worthless (the stock closes at or above $90 on the expiration day), he keeps that $800. If the person who owns that option exercises it, then that $800 helps offset Toby’s purchase price, making his net cost to buy closer to $82 a share ($8,200 per contract). In addition, Toby could potentially buy back that put at whatever the current market price is before it expires, making a net profit or loss on the option itself.
It is important to note that options are leveraged investment tools. They tend to magnify both potential gains and potential losses vs. standard stock ownership. That magnification can itself be multiplied in a margin-enabled account, where it’s often possible to take on a lot more risk then you recognize at first glance, thanks to the math involved.
Beginning options investors with margin accounts often get lured by the premiums for selling puts and think something along the lines of “oh look, free money”, especially when the market generally trends upwards. That line of thinking quickly backfires when a stock drops and that investor either gets margin called or has to pony up many times that initial premium to buy the stock. This is not to say “avoid options investing”, but rather to say “recognize the magnified risks involved and be careful if you do choose to invest using options.”
Regards,
-Chuck
Home Fool
4 Likes