Selling a Call Option
/So Taylor Swift tickets are already very expensive. And they might get more expensive. But we all know of concert ticket prices that have risen dramatically in a short period of time, from not very expensive to super expensive. This reality helps to illuminate another option transaction.
At the end of 2021, Zach Bryan was still in the US Navy. He was honorably discharged and released American Heartbreak in January of 2022. He began touring shortly after, and, though it’s hard to believe from today’s vantage point, in early 2022 there was a time, a very brief time…when ticket prices for his shows were not yet insane.
Imagine you had been among the first wave of Zach Bryan's super fans and you snagged a concert ticket for his show at Red Rocks Amphitheater for $100. Not long after, a friend, with an inkling about Bryan's surging popularity, suspects ticket prices are about to soar.
So your friend proposes a deal: He'll give you $10 now for the right (not the obligation, but an option) to buy your Zach Bryan ticket for $150 anytime before the concert.
Your friend has made no commitment (other than paying you the $10). It's just an option for him. If he chooses to exercise this option, he'll pay you the agreed $150, and the ticket becomes his. If he doesn't act on it, you simply pocket the $10 from the option sale, his right expires, and you keep the ticket. But if he does exercise the option, then you are committed to selling your $100 ticket to him for $150.
Fast forward, and Zach Bryan's fame explodes.
Tickets for that Red Rocks show are now trading for thousands. If you agreed to your friend's offer, you'd make a $60 profit ($10 from the option and $150 from the ticket sale, minus your initial $100 ticket purchase).
While you are happy with your $60 profit, given the surge in ticket prices, you could have made a lot more. And you missed the show.
Your friend, meanwhile, can attend the concert for a fraction of its current ticket price. Imagine his smug satisfaction! Or he could even sell his option at a higher rate, netting him a tidy profit.
In a rising market, everyone wins. But some win more than others. Timing is everything.
This transaction — where you sold a claim (an option) on the future value of an asset — exemplifies selling a "call option".
In our next segment, we'll delve into buying a "put option", using the concert ticket framework.