Travelzoo Stock Give Away

Stock options derive their value from the underlying asset; they are not independent like shares in a publicly traded company or commodity contracts. It is easier to think of stock options as ‘what if’ contracts.

What if an investor feels that stock ABC will go from 10 dollars to 20 dollars per share in the next six months? He would no doubt want a contract that would allow him to purchase stock ABC during that time period.

What if a trader felt that stock ABC would drop from 10 dollars to 8 dollars in the next month? Then he would benefit from a contract that would allow him to sell shares of ABC at an agreed upon price, but cover them or replace the shares at future prices, which he hopes will be considerably less.

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