Re: PoTUS 45 LVXII: Pandemic Legacy Season 3
Me reading that:
<img width=500 src=https://i.imgur.com/5T0NSSLh.jpg>
Bass has paid a small amount (say $1) to bet that a stock currently at $150 will be worth $100 on a certain date; at that date, the other side has to buy the stock at $100 if Bass so chooses. (I'm making up numbers here but the idea is the same.) That amount Bass paid ($1) is determined by how likely the drop is (which can depend on the company but ALSO how close it is currently to that price) and how long Bass has to exercise it (longer means there is more time for it to fall, so longer usually means you pay more for the put).
One way to make money is if the price drops below $100. If it's at $95, Bass gets a profit of $5 for each share ($4 total when you factor in the $1 Bass paid for each put).
But, Bass can also sell the put option, rather than exercise it. If the price drops down to $101, it starts to look pretty **** good that it will end up in the money (below the strike price). Other people will suddenly be willing to pay Bass more than $1 for it, because it's looking pretty darn likely it will go below $100, and Bass bought in back when it looked less likely. Bass can certainly wait and see if it drops below $100, but Bass could also see that someone is now willing to pay $5 for each put option, and that's a 500% increase over what Bass paid!
If the price goes in the money (below $100), Bass could even then still choose to sell the put option rather than exercise it. At that point, the option is DEFINITELY worth something. But maybe it will go down more, and be definitely worth more. Who knows? But the point is, someone will be willing to up what they pay for the option based on these factors.
So with options, there's the vanilla option of exercising it and the more interesting option of selling it based on how things change over time. Sort of like how for bonds there's the vanilla option of holding them to maturity, and selling them based on how rates and company factors change in the meantime.
I'm sure I missed some minor details here but hopefully the idea makes sense.
