What is a Stock Option:
Before we begin, you need to understand what is a stock option first.
So here's a link to help you understand what is a stock option.
Continue reading after you understand what's a stock option 😉.
TDLR (Too Long Didn't Read) of a Stock Option
A stock option is a 'contract' that lets you buy a specific stock at a specific price by a specific date.
Eg; I pay $1 to buy a stock option that allows me to buy 1 Microsoft share at $50 before August 2020.
Scenario 1: I exercise my stock option
I can exercise the stock option to buy the Microsoft share, and my total cost of the share is $51 ($50 + $1).
It makes sense to exercise my stock option when Microsoft's share price is above $51 (eg; $52) because then I can sell it straight to the stock market and profit from the difference.
Scenario 2: I don't exercise my stock option
But if Microsoft's share price remains below $50 by August 2020, I will let my stock option expire, and I will lose $1 that I spent buying that option (cost of the stock option).
Scenario 3: I sell my stock option
I can also sell my stock option to other people in the market that are interested in it.
Eg; if Microsoft share price rises to $52, people can bid for my stock option for $1.50 (they can then exercise the stock option, sell the stock, and profit $0.50).
If I sell to them, I will earn $0.50 without going through the hassle of buying to exercise my stock option and then selling my shares to the market.
Recommended Read: CPF LIFE in the Year 2020
How is Owning an HDB like Owning a Call Option?
- There is a time value to both HDB and Stock Option
When the stock option reaches its expiry date, it becomes worthless. Before that date, however, there is a value associated with it.
The same can be said for HDB also before it reaches the end of its 99-year lease, it has a value to it. Once it reaches the end of the 99-year, there is no more value to it. - You can sell your Stock Option or HDB to reap a profit (or loss)
You bought a stock option for $1, after some time the price of the stock option increases to $2 before its expiry date. You can sell the stock option to earn $1 in profit. Similarly, if the price of the stock option drops to $0.50 and you sell it, you will incur a loss of $0.50.
The same can be said for HDB as well, you can buy an HDB for $500k and sell it for $600k after 10 years and earn a $100k profit. You can also sell it for $450k 10 years later and incur a $50k loss. - You own the Stock Option or HDB, not the underlying asset
In the case of a stock option, you own the stock option and not the underlying stock (the asset) the stock option is tracking. Eg; you buy a Microsoft stock option, you do not own any Microsoft share as a result, you merely own the stock option that allows you to purchase the Microsoft share.
For the HDB, you own your HDB, but not the land it is built. - The Difference?
You can exercise the stock option to buy the underlying stock (eg; Microsoft). But you cannot exercise your HDB to buy the underlying land. Once the 99-year lease is up, there goes the HDB. So you either apply for Lease Buyback Scheme before the end of your HDB or sell it to someone before your 99-year lease expires.
Are there any other similarities that you have spotted between HDB and a Stock Option?
Let us know in the comments below 😉
Recommended Read: What is CPF Enhanced Retirement Sum (ERS)?
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