Money Rehab with Nicole Lapin - Call (Options) Me Maybe?

Episode Date: February 2, 2022

Options are pretty much what they sound like: the option to buy a stock or commodity at a certain price in the future. Are they for you? Tune in to today’s episode to find out! Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. As we learned last week, stocks and bonds are quite different assets,

but they do have some general overlap. With stocks and bonds, investors purchase the security, and then they own it. The end. But there's a different type of asset class called derivatives. And derivatives play a whole different ballgame because, as the name suggests, derivatives are not necessarily assets outright, but rather investment opportunities that derive their value from another asset. And to complicate matters further, derivative securities are often valued based on projections of future market trends, which make them highly speculative.

If you're confused, you're not the only one. Here's our listener with today's question on a particular type of derivative, options. Here he is. Hey, Nicole. My name is Mark and I live in New York City. I was wondering if you could do an episode on options like stock stuff. I'm interested in getting a career in finance, but it's still a concept that trips me up. Thank you. Options are pretty much what they sound like. The option to buy a stock or commodity at a certain price in the future. If the stock price turns out to not be what they hoped when the date comes, the investor can basically say, psych, just kidding, and doesn't have to buy the stock.

So you are essentially putting a deposit down to buy or sell an investment. And again, you can choose to not pay the whole thing when the time comes, but then, of course, you'll lose your deposit. Like most financial concepts, I think options make the most sense in a real-life context. One of the earliest examples of options comes to us from Thales, who was an expert astronomer and philosopher in ancient Greece. Through observing certain patterns in the stars, Thales anticipated that there would be an excellent off-the-charts olive crop in the upcoming harvest. Thales, being advanced in his money rehab, of course, wanted to figure out how much to monetize his research. He thought that if there were to be an awesome olive crop, that he should purchase olive oil presses now before they got scooped up closer to the harvest.

Although Thales had a good feeling that his prediction would pay off, he wasn't entirely sure. He was pretty confident in his astrological readings, but it wasn't an exact science, but perhaps a bit more exact than astronomy-based horoscope readings. Sorry. Therefore, he negotiated a deal with local olive oil manufacturers. He would pay them a fee right then and there in order to secure the option to buy all of their olive oil presses later, at the beginning of the harvest season. Then, when harvest season rolled around, Thales could decide once and for all whether to buy the olive oil presses or not. Fast forward to harvest season, Thales' readings were correct. There was an amazing crop, and when it came time to decide whether to take the option

to buy the olive oil presses, it was an easy and resounding yes. In modern day 2022, this is essentially still how options work. And even now, options are still very helpful for farmers and other folks working in agricultural or commodities-based industries. There are two kinds of options, call options and put options. Call options give you the option to buy an investment at a certain date for a certain price. Put options give you the option to sell an investment at a certain date for a certain price. Options are a pretty complicated financial topic, so I'm going to use the next two episodes to fully unpack modern day examples of call options and put options. As we go into these examples, there may be moments where the

information feels complex. When that happens, don't panic. There's a foundational golden rule that you can always return to when things get a little fuzzy. An investor will want to execute a call option when they have a hunch that the price of a stock may go up. And so they want to secure the right to buy that stock at a lower price. Now, you may be thinking, if an investor has a hunch that the value of a stock is going to go up, why wouldn't they just buy the stock now? Well, remember, the whole advantage of a stock option is that you have the option to buy the stock at a certain price later on, right? So if the hunch is incorrect, happens to the best of us, and the stock price actually drops,

you can decide not to buy the stock at the price you reserved. On the flip side, an investor will want to execute a put option when they have a hunch that the price of a stock they own may go down. And so they'll want to be able to sell the stock at a higher price later on. Essentially, investors will only exercise an option if their hunch was correct. And if it wasn't, they don't need to take the option. For today's tip, you can take straight to the bank. It's really helpful to understand call options, but that doesn't necessarily mean you have to go out and buy all of the options under the sun. This is just another tool in your financial tool belt. And if the concept is still dizzying,

stay tuned for tomorrow's episode where I'll dig into more of the nitty gritty. You have tomorrow's episode number? 219? So listen, maybe. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli.

Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.