How is it possible? I thought you can only lose what you put in. So 100% max. But I’ve seen news and posts about how people lose much more than that.
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Lets say the price of a company is $5 per share. For $100 I sell you the right to buy 1000 shares of that stock from me at $6 a share a couple months from now.
If I actually own 1000 shares of that stock, there’s not much risk, either the stock goes down and I’m ahead of where I would have been by $100, the stock goes up a little and i’m ahead by $100, or the stock goes up a lot and you exercise the options, paying me $6 per share, while I miss out on what I would have made from the price going over $6.
If I don’t own shares of the stock, I’m better off in the first two cases because I made $100 with no assets tied up. However if the price goes up a lot, I’m still contractually obligated to buy them at market price and sell them to you for $6. If it went up to $16, I now have to cough up $10,000 to satisfy the contract, even though I could have bought those shares for $5000 back when I sold the options.
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