Selling a Put Option: The KISS Tour Without The Makeup

Sometimes the most interesting derivatives and options scenarios revolve around markets where there is real uncertainty, and good arguments can be made for both a bullish case and a bearish case.

Let’s revisit concert tickets one last time. KISS, renowned for their theatrical makeup and larger-than-life stage personas, made a bold move in the early 1980s by announcing a tour without their iconic makeup. 

This decision polarized fans. Some believed that the band's music and performance prowess alone were enough to draw in the masses. But others felt the makeup was an intrinsic part of the KISS experience and that ticket sales would suffer without it.

So let’s imagine an options scenario which could have come along in this context.  Imagine John, a lifelong KISS fan, who truly believes in the band's music.  He is confident the tour will succeed, makeup or no makeup. 

Jane, however, is skeptical. She thinks that the lack of makeup will lead to dwindling ticket sales and discounted prices.

Seeing an opportunity, John says to Jane, "Pay me $30 now, and I’ll give you the option to sell me a ticket to the KISS unmasked concert for $150 any time before the show." 

By doing this, John is effectively selling Jane a put option on the ticket. John believes ticket prices will not drop below $150. 

Jane, on the other hand, is hedging her bets. By paying the premium, she locks in the ability to unload her ticket for $150, protecting herself if the market value plummets.  That downside protection costs her $30.

As it happens, the KISS unmasked tour was neither a resounding success, nor a dismal failure.  No one was really happy with it, but no one was too upset with it.  Ticket prices did not fluctuate in the aggregate very much.  Individual venues and dates fluctuated, but no macro-pattern emerged.

So with regards to the micro-transaction between John and Jane, if, as the concert date approached, tickets were going for $250, then Jane would obviously not exercise her option to sell for $150.  She would just let the option expire.  But she enjoyed the insurance and the downside protection, because if ticket prices had dropped to $100, then she would have exercised her option, sold her ticket to John for $150.  John had committed to buy at that price, and for that obligation he pocketed the $30 premium.  

This illustrates how differing perceptions about an event's outcome can create opportunities in the options market and individual risk assessments end up governing transactions.