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- hmmm... Hi...- You must be Matt. I'm Sebastian.Still visibly confused, Matt couldn't understand what was this strangerdoing dripping wet in his kitchen.- And you are?- I'm sorry to scare you, my name is Sebastian.- I got that but I don't know why you are here...- Patrick didn't tell you anything?- Huh... No. Are you guys dating?- Not at all, he's just a friend. We met last year in Europe. I'm flyingback to Frankfurt on Monday and he emailed me that I could stay here...That was totally Patrick, Matt thought. It was okay though, let's say thathis very good looks and skimpy attire had convinced Matt to let him stay.- It's okay, no worries, make yourself at home. You want a drink?- We can have a beer, just give me a minute to get dressed.- So, Matt asked when Sebastian came back, how did you get in?- Well, Patrick told me about the key under the mailbox.- Oh well...It took only a few minutes for Matt to be charmed by Sebastian. He was notjust a beautiful man, his German accent. If the price of the stock went down (as the plan called for – as Jeff was hoping it would) the option to buy (call) would be useless: who would want the option to buy something for (for example) $50 when it was selling on the open market for $40? And, of course, the sell option (put) would be worth $10. But remember that each option is for 100 shares, so if the price of the stock fell by $10, that would be worth $10 x 100 = $1000.So consider the result from the bank’s point of view: pay $20 for a call + get $20 for a put + LOSE $1000 because they had to buy the stock for $50 when it was worth only $40 (in our example).What’s the big deal? They lost $1000 on an option. For 100 shares. But they were dealing in millions of shares. For EACH stock. And there were hundreds of different stocks.So, if the bank had only a million shares (only a million shares! Imagine that.) that worked out to be a loss of 10 million dollars. And they didn’t have a million shares. They had several million: 2.
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