| Topic Name: |
ACN Share Price |
| Message Name: |
My understanding is that |
| Date Posted: |
02/09/2006 |
| In Reply To: |
Options are a form of derivative contract in legal terms, accounting rules and in reality.
Insider does not mean you own 10%+ of the company. It simply means you have information not publicly available. You can be an insider trader on a single share or with minimal gains. Ask Martha about that. I think her economic profit on the trade in question was under $25,000.
The problem is using puts to protect your investment creates a fairly large exposure that is probably not worth the risk (let alone the transaction costs). You're better off managing your risk through diversification. |
| Message: |
option is a form of financial derivative that can be highly dangerous if used without discretion, i.e., writing naked calls, etc. However, just like anything else, if used properly, option can actually reduce risks and hedge bets in ways that diversification never could.
And no, insider in this particular context does not mean you own 10% of the company. I believe the proper term is "non-public material information." In another words, if you trade stocks based on information that the public is not supposed to know about, you are commiting insider trading.
In the example that new_dude gave, it's perfectly valid, in the financial sense, to hedge his bet by purchasing 10 puts for his 1000 shares which he already owns. Sure he lost moeny in commission, option premium, and any potential upside swing action in the stock; what he gains is the ability to lock in the profit, not to mention peace of mind.
However, if the person acted based upon "non-public material" information, then it's a whole new story.
Inccidentally, one could just "short against the box" if he(she) just want to protect the gain. Option is not the only way to hedge.
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