Options and Warrants
Chapters in this video
- 0:00 What a derivative is and why it has no independent value
- 1:30 The magic number 100 and the OCC as financial bouncer
- 2:28 Call up, put down and the put moneyness trap
- 3:49 Buyers have rights, writers have obligations and unlimited naked call risk
- 4:52 Breakeven formulas and American versus European exercise styles
- 5:47 Protective puts as insurance and covered calls for premium income
- 7:17 Rights versus warrants: dilution protection versus dilution creation
- 8:42 Rapid-fire exam recap
What this video covers
- Why a derivative has zero independent value, and how an option's worth is entirely derived from its underlying asset
- The Options Clearing Corporation (OCC) as guarantor and counterparty, and how it eliminates counterparty risk through standardization and random assignment
- The call up, put down mantra: when each option type is bullish or bearish, and how put moneyness is the exact reverse of call moneyness
- Why option buyers have rights with max loss capped at premium paid, while writers have obligations with theoretically unlimited risk on naked calls
- How to calculate breakeven prices using call up (add premium to strike) and put down (subtract premium from strike)
- The protective put as insurance for a bullish stock owner, and why it is not a bearish strategy despite involving a put purchase
- Subscription rights versus warrants: which protects from dilution, which causes it, and the mnemonic rights equal right now, warrants equal wait for it
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