compared to calls, put are more like insurance (barrier option

Compared to a call, a put is more like traditional insurance. (Barrier option is a cheaper insurance than vanilla options. Down-and-in European Put is a common barrier option.)

Having an ITM call is like a shopping _coupon_ ” buy a beer at $1 with this coupon “.
* you can resell the coupon or use as gift voucher

An OTM call (more common than ITM) is like an above-market airticket offer for those affluent travelers who need last minute booking.

For puts, Commodity puts are more intuitive than equity puts. FX options and swaptions are less intuitive. Here’s an illustration —

Suppose a farmer receives guarantee from Walmart to buy his 2019 produce at a pre-set fairly low price whenever he wants within the harvest season.

  • * OTM — pre-set price is low because Walmart is providing a “distress assistance” price
  • * farmer has to pay a “membership” for this guarantee
  • * membership can be traded
  • * put writer is typically a wholesaler like Walmart who needs to regularly source the product in bulk.
    • My friend Trevor Tang is also a put writer, who doesn’t mind receiving the underlyer

Commodity option is the most intuitive. When you write a put on wheat, you advertise to take IN wheat that’s PUT OUT by the option holder. Incidentally, the strike price is typically below the current underlier price (OTM), but the take-in-PUT-out actions happen when underlier drops below the strike.

ITM call/put are more intuitive, but OTM are more important in practice.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s