![]() ![]() Most coupons are free, but as we've mentioned, you have to buy an option. ![]() This is a good place to re-emphasize one key difference between a coupon and a call option. In this scenario, you would make money buying and selling only the option you’d never own actual Purple Pizza shares. Since you bought the option when it had less value-i.e., when Purple Pizza stock was selling for less than $50 per share-you can potentially sell your option for a higher price and make a profit (not counting fees and commissions). Either way, you will have used your option to buy Purple Pizza shares at a below-market price.Īnother possibility is to sell the call option to someone else before it expires, giving them the right to buy Purple Pizza shares at the below-market price of $50 per share. Or you could hold on to the shares and see if the price goes up even further. Now, if you were to exercise your option, you could buy shares for $50, then re-sell them on the open market for $55 each. Let's say the price of the stock does, in fact, go up to $55 per share. Instead, you could hang on to the call option in hopes that the stock moves above $50 before the call expires. If the shares are trading at less than $50, it’s unlikely that you would exercise the call, for the same reason that you wouldn't use a $12 coupon to buy a $10 pizza. A Purple Pizza Co December 50 call option would give you the right to buy 100 shares of the company's stock for $50 per share on or before the call's December expiration. Now, let's translate this idea to the stock market by imagining that Purple Pizza Company's stock is traded on the market. In the language of options, you'll exercise your right to buy the pizza at the lower price. On the other hand, if pizzas are selling for $20, then the coupon has $8 of real value, and you'll use it. Are you going to use the $12 coupon? Obviously not. Normally, you'll only use the coupon if it has value. This is essentially a call-it gives you an option to buy the pizza for $12, and it expires on a certain date. Suppose you have a coupon from the Purple Pizza Company that lets you buy a pizza for $12, and it's valid for a year. ![]()
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