Shelf transactions are transactions in which it is not determined who in the transaction will be the seller and who will be the buyer. One of the participants in the transaction, having paid a certain fee to another, acquires an option , which gives him the right to buy or sell a certain amount of securities during the option period of his choice. For example, one of the parties to the transaction acquired an option to buy shares of company X at a price of $ 80 apiece or the right to sell these shares at a price of $ 60 apiece. The price of this option is $ 20 per share.
By purchasing the option, the holder of the option will monitor the change in the price of shares of company “X”. 60 dollars and 80 dollars - these are the so-called "shelf points". If the stock price of company “X” is between these points, the option buyer will incur a loss of $ 20 per share. For example, the stock price at the moment is $ 70 per share, and the option holder has the right to buy shares from the seller at a price of $ 80 per share. Consequently, the holder of the option will not buy shares. However, the option holder also has the right to sell shares at a price of $ 60 per share, that is, below the market rate. Consequently, he will not take advantage of his right as a seller.
If the stock price of company “X” drops below $ 60 per share or rises above $ 80, then the option holder will exercise his right and will sell or buy shares. With a stock price of $ 40 or $ 100, the owner of the option will reimburse his costs for its purchase, and if the price rises above $ 100 or falls below $ 40, he will start to receive net profit.