What does this statement regarding put options mean?
The trader has purchased 1095 options, each of which is a contract which entitles him to sell 100 shares of Cisco stock for $16 a share. He paid $71 for each contract (71 cents a share x 100) which is roughly $78k total. He will get $109,500 for each dollar below $16 Cisco's stock is when he exercises it (he can buy the stock for the going rate and then sell it for $16 immediately), or he can sell the option itself to someone else for a similar gain (usually a little more, especially if the option has a long time until it expires). If the option expires when the stock is over $16/share, he gets nothing; i.e. the original $78k is lost. For reference, Cisco's stock was trading at $17.14/share as of market close on March 18, 2010. The share price had recently been boosted by the recent news that they would be paying a quarterly dividend. It has been heading mostly downward since February 9, after they announced that they're not expecting profits to be as good as the analysts thought they would be: they claim that people aren't buying too much networking equipment just now, and they're also facing mounting competition from the likes of HP and Juniper for switches, and Aruba / HP / Motorola for wireless devices. They may lose market share or need to cut prices, hurting profits. Either way, there's certainly a real possibility of their stock going below $16 in the next few months, so people are willing to pay for those options. (Disclosure: I work for Aruba, who competes with Cisco. I also own shares of Aruba, possess assorted stock options and similar equity grants, and participate in the employee stock purchase program.  I also own shares in Cisco indirectly through various mutual funds and ETFs.) "fennec has a very good answer but i feel it provides too much information. So i'll just try to explain what that sentence says. Put option is the right to sell a stock. ""16 puts on Cisco at 71 cents"", means John comes to Jim and says, i'll give you 71 cent now, if you allow me to sell one share of Cisco to you at $16 at some point in the future ( on expiration date).  NYT quote says 1000 puts that means 1000 contracts - he bought a right to sell 100,000 shares of Cisco on some day at $16/share. Call option - same idea: right to buy a stock."
"An option is a financial instrument instrument that gives you the right, but not the obligation, to do some transaction in the future at a given price. An employee stock option is a kind of ""call option"" -- it gives you the right, but not the obligation, to buy the stock at a certain price (the ""exercise price"", usually set as the price of the stock when the option was granted). The idea is that you would ""exercise"" the option (buy the stock at the given price as provided by the option), if the value of the stock is higher than the exercise price, and not if it is lower. The option is gifted to you. But that does not mean you get any stock. If and when you choose to exercise the option, you would buy the stock with your own money. At what time you can exercise the option (and how many shares you can exercise at a given time) will be specified in the agreement. Usually, you can only exercise a particular share after it has ""vested"" (according to some vesting schedule), and you lose the ability to exercise after you no longer work for the company (plus perhaps a grace period), or after the option expires." Historical volatility of a stock is going to be based on past performance, basically its current trend.  That can be useful, but really is no indication of how it will perform in the future.  Especially with a big swing in the market. Now if you're talking about implied volatility (IV) of an options contract, that's a little different.  IV is derived from an option’s price and shows what the market “implies” about the stock’s volatility in the future. Thus it is based on the actions of active traders and market makers.  So, it gives you a bit more insight into what's going on, but at times has less to do with fundamentals. I guess a good way to think of IV based on options contracts is as an educated opinion, of the market as a whole, with regards to how much that stock could likely move over a period of time (options expiration). Also note that IV represents the potential for a stock to move, but it does not forecast direction. I don't know of any studies off the top of my head, but I'm sure there have been plenty. "When you buy a put option, you're buying the right to sell stock at the ""strike"" price. To understand why you have to pay separately for that, consider the other side of the transaction. If I agree to trade stock for money at above market rates, I need to make up the difference somewhere or face bankruptcy.  That risk of loss is what the option price is about. You might assume that means the market expects the price of AMD to fall to 8.01 from it's current price of 8.06 by the option expiration date. But that would also mean call options below the market price is worthless. But that's not quite true; people who price options need to factor in volatility, since things change with time. The price MIGHT fall, and traders need to account for that risk. So 1.99 roughly represents the probability of AMD rising to 10. There's probably some technical analysis one can do to the chain, but I don't see any abnormality of AMD here." "To understand the VXX ETF, you need to understand VIX futures, to understand VIX futures you need to understand VIX, to understand VIX you need to understand options pricing formulas such as the ""Black Scholes"" formula Those are your prerequisites. Learn at your own pace. Short Answer: When you buy VXX you are buying the underlying are front month VIX futures. Limited by the supply of the ETF's NAV (Net Asset Value) units. It is assumed that the ETF manager is actually buying and selling more VIX front month futures to back the underlying ETF. Long Answer: Assume nobody knows what an options contract should be worth. Therefore formulas have been devised to standardize how to price an options contract. The Black-Scholes formula is widely used, one of the variables in this formula is ""Implied Volatility"", which basically accounts for the mispricing of options when the other variables (Intrinsic Value, delta, gamma, theta...) don't completely explain how much the option is worth. People are willing to pay more for options when the perception is that they will be more profitable, ""implied volatility"" tracks these changes in an option's demand, where the rest of the black-scholes formula creates a price for an option that will always be the same. Each stock in the market that also trades standardized options will have implied volatility which can be computed from the price of those options. The ""Volatility Index"" (VIX), looks at the implied volatility of MANY STOCK's options contracts. Specifically the ""implied volatility of out the money puts on the S&P 500"". If you don't know what that quoted part of the sentence means, then you have at least five other individual questions to ask before you re-read this answer and understand the relevance of these followup questions: Why would people buy out-the-money puts on the S&P 500? Why would people pay more for out-the-money puts on the S&P 500 on some days and pay less for them on other days? This is really the key to the whole puzzle. Anyway, now that we have this data, people wanted to speculate on the future value of the VIX. So VIX futures contracts began trading and with it there came a liquid market. There doesn't need to be anything physical to back a financial product anymore. A lot of people don't trade futures, retail investors have practically only heard of ""the stock market"". So one investment bank decided to make a fund that only holds VIX futures that expire within a month. (front month futures). They split that fund up into shares and listed it on the stock market, like alchemy the VXX was formed. Volatility studies are fascinating, and get way more complex than this now that the VXX ETF also has liquid options contracts trading on it too, and there are leveraged VIX ETF funds that also trade options" Yes, theoretically you can flip the shares you agreed to buy and make a profit, but you're banking on the market behaving in some very precise and potentially unlikely ways.  In practice it's very tricky for you to successfully navigate paying arbitrarily more for a stock than it's currently listed for, and selling it back again for enough to cover the difference.  Yes, the price could drop to $28, but it could just as easily drop to $27.73 (or further) and now you're hurting, before even taking into account the potentially hefty commissions involved. Another way to think about it is to recognize that an option transaction is a bet; the buyer is betting a small amount of money that a stock will move in the direction they expect, the seller is betting a large amount of money that the same stock will not.  One of you has to lose.  And unless you've some reason to be solidly confident in your predictive powers the loser, long term, is quite likely to be you. Now that said, it is possible (particularly when selling puts) to create win-win scenarios for yourself, where you're betting one direction, but you'd be perfectly happy with the alternative(s).   Here's an example.  Suppose, unrelated to the option chain, you've come to the conclusion that you'd be happy paying $28 for BBY.  It's currently (June 2011) at ~$31, so you can't buy it on the open market for a price you'd be happy with.  But you could sell a $28 put, promising to buy it at that price should someone want to sell it (presumably, because the price is now below $28). Either the put expires worthless and you pocket a few bucks and you're basically no worse off because the stock is still overpriced by your estimates, or the option is executed, and you receive 100 shares of BBY at a price you previously decided you were willing to pay.  Even if the list price is now lower, long term you expect the stock to be worth more than $28.  Conceptually, this makes selling a put very similar to being paid to place a limit order to buy the stock itself. Of course, you could be wrong in your estimate (too low, and you now have a position that might not become profitable; too high, and you never get in and instead just watch the stock gain in value), but that is not unique to options - if you're bad at estimating value (which is not to be confused with predicting price movement) you're doomed just about whatever you do. "According to the book of Hull, american and european calls on non-dividend paying stocks should have the same value. American puts, however, should be equals to, or more valuable than, european puts. The reason for this is the time value of money. In a put, you get the option to sell a stock at a given strike price. If you exercise this option at t=0, you receive the strike price at t=0 and can invest it at the risk-free rate. Lets imagine the rf rate is 10% and the strike price is 10$. this means at t=1, you would get 11.0517$. If, on the other hand, you did'nt exercise the option early, at t=1 you would simply receive the strike price (10$). Basically, the strike price, which is your payoff for a put option, doesn't earn interest. Another way to look at this is that an option is composed of two elements: The ""insurance"" element and the time value of the option. The insurance element is what you pay in order to have the option to buy a stock at a certain price. For put options, it is equals to the payout= max(K-S, 0) where K=Strike Price and St= Stock price.  The time value of the option can be thought of as a risk-premium. It's difference between the value of the option and the insurance element. If the benefits of exercising a put option early (i.e- earning the risk free rate on the proceeds) outweighs the time value of the put option, it should be exercised early. Yet another way to look at this is by looking at the upper bounds of put options. For a european put, today's value of the option can never be worth more than the present value of the strike price discounted at the risk-free rate. If this rule isn't respected, there would be an arbitrage opportunity by simply investing at the risk-free rate. For an american put, since it can be exercised at any time, the maximum value it can take today is simply equals to the strike price. Therefore, since the PV of the strike price is smaller than the strike price, the american put can have a bigger value. Bear in mind this is for a non-dividend paying stock. As previously mentioned, if a stock pays a dividend it might also be optimal to exercise just before these are paid." The risk situation of the put option is the same whether you own the stock or not.  You risk $5 and stand to gain 0 to $250 in the period before expiration (say $50 if the stock reaches $200 and you sell).   Holding the stock or not changes nothing about that.  What is different is the consideration as to whether or not to buy a put when you own the stock.  Without an option, you are holding a $250 asset (the stock), and risking that money.  Should you sell and miss opportunity for say $300? Or hold and risk loss of say $50 of your $250?  So you have $250 at risk, but can lock in a sale price of $245 for say a month by buying a put, giving you opportunity for the $300 price in that month.  You're turning a risk of losing $250 (or maybe only $50 more realistically) into a risk of losing only $5 (versus the price your stock would get today). Let's work from the inside out. Options are not stock. Options are a contract that give you the right to own the stock. For options to have value they have to be exercised. Straight line means that each quarter 1/16th of the option grant becomes yours and the company cannot take it away. Four quarters in a year times four years is 16 quarters. 'Grant' means they are giving you the options at no cost to you. 'Nonqualified' means that there is nothing you have to do, or be, in order to get the options. (Some options are only for management.)