Options Quiz

[MoralHazard]

Quote from KPS21:

My only point in comparing it to the pure CD position was to show that there is indeed risk.

But OF COURSE THERE IS RISK!!!!! You just bought a put. You bought the put for $3.70. You didn't buy it for free.

The fact that you can get interest on the rest of your money (in the form of a CD) has nothing to do with it. NOTHING AT ALL.

The put may or may not be well priced. I respect the fact that some of you think the put is too cheap at $3.70.

The price of the put is obviously related to the interest rate. In fact, if CD rates were at 6%, $3.70 would be an awful price to pay for the same put. Just ask the market maker who sells you the put and will be collecting short rate interest on the money from the sale of the $42 stock.

Well put (excuse the pun). The strategy is risky relative to a riskless one (buy a Treasury) because in one outcome (QQQ goes up) you earn a lower rate of return, while in the other you earn more (QQQ goes down). The alternative is not "put your money under a mattress" (which is possibly the colloquial use of "no risk"). This thread is well on its way to developing the theory of risk neutral pricing; Stockholm beckons . BTW, is this the sort of strategy I'd get in one of those $3,999-type seminars that promise excess returns at "no risk"? :eek: