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KembaraXtra – Islamic Derivatives: Making Money with Stock Options (Note Form)
🔹 1. What is “Spread”?
👉 Spread = Stock Price (S) − Strike Price (K)
✔ It shows:
✔ Example
👉 Spread = 25 − 10 = $15 per share
🔹 2. Types of Option Positions
✔ In-the-Money (ITM)
👉 Option has value
✔ Example:
✔ Out-of-the-Money (OTM)
👉 Option has no value
✔ Example:
✔ At-the-Money (ATM)
👉 No gain, no loss
🔹 3. Call vs Put (Simple Logic)
✔ Call Option
✔ Put Option
🔹 4. Private vs Public Company Options
✔ Public Company
✔ Private Company
👉 Profit only when:
🔹 5. Key Issue (Private Company)
👉 Even if option is profitable:
🔹 6. Key Insight
👉 Profit in options depends on:
🔹 Simple Summary
🔹 Final Exam Insight
👉 “The profitability of stock options depends on the spread between the stock price and exercise price, with options being in-the-money, out-of-the-money, or at-the-money, while realization of gains depends on market liquidity.”
🔹 1. What is “Spread”?
👉 Spread = Stock Price (S) − Strike Price (K)
✔ It shows:
- How much profit per share
✔ Example
- Strike price (K) = $10
- Stock price (S) = $25
👉 Spread = 25 − 10 = $15 per share
🔹 2. Types of Option Positions
✔ In-the-Money (ITM)
- Condition: S > K
- Spread = Positive
👉 Option has value
✔ Example:
- S = $25, K = $10 → Profit exists
✔ Out-of-the-Money (OTM)
- Condition: S < K
- Spread = Negative
👉 Option has no value
✔ Example:
- S = $8, K = $10 → No profit
✔ At-the-Money (ATM)
- Condition: S = K
- Spread = 0
👉 No gain, no loss
🔹 3. Call vs Put (Simple Logic)
✔ Call Option
- Profit when: S > K
- Buy low (K), sell high (S)
✔ Put Option
- Profit when: S < K
- Sell high (K), buy low (S)
🔹 4. Private vs Public Company Options
✔ Public Company
- Shares are traded in market
- Easy to:
- Sell shares
- Realize profit
✔ Private Company
- No active market for shares
👉 Profit only when:
- Company buys back shares
- IPO happens
- Company is sold
🔹 5. Key Issue (Private Company)
👉 Even if option is profitable:
- ❗ You may not be able to sell shares immediately
- Must wait for liquidity event
🔹 6. Key Insight
👉 Profit in options depends on:
- Difference between market price and strike price
- AND ability to sell the shares
🔹 Simple Summary
- Spread = S − K
- ITM → profit
- OTM → no profit
- ATM → neutral
- Private company → profit may be delayed
🔹 Final Exam Insight
👉 “The profitability of stock options depends on the spread between the stock price and exercise price, with options being in-the-money, out-of-the-money, or at-the-money, while realization of gains depends on market liquidity.”
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