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Thanks for the post, I know it was awhile ago but I have a question. Since they bought the right to buy the stock at 40 doesn’t that mean part of the cost of the trade is 8000*40? So if the stock went to 60, that means they really made (60-40)*8000 = 160,000. I can see how owning 8000 shares at 60 is around 500,000, but don’t they essentially loose the 8000*40?
ReplyHi Mike,
When you buy options, you do not pay the full price of the stock. In the example you quoted, it could be a few dollars only. A $20 gain on a few dollars investment is a huge multiplier.
ReplyThanks for the response. So they sold the options at around $20? (8000 * 20 = 526,000). They didn’t actually buy the stock at $40 then simultaneously sell at $60 or something like that.
ReplyDear Mike, I can’t remember the numbers from the book but the trade could be something like buy the options at $1 and sold all at $21.
ReplyBefore the financial crisis in early-mid 2008 CFA magazine already carried an article on subprime implosion. The descriptions in the article was almost unbelievable in terms of how Americans borrowed money. My stock broker was a bit slower to show me the same article. The US market has a depth that is unparalled anywhere in the world.
ReplyYes, the subprime actually started to unravel in 2007. There was one last bear trap before everything exploded in 2008.
ReplyGood reading is just that, occupies your time & feeds your mind, but does nothing else, if you can’t translate it to fish profitably for yourself in the financial market. Don’t you agree ?
ReplyHi James, all the knowledge in the world will not help if it is not translated to action. I feel that a lot is dependent on the reader.
ReplyRead his continuing series on the European financial implosion on Vanity Fair’s website.
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