eli5: How do stock options work?

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I’m reading up on investing and I just can’t wrap my head around options. Help!

In: Economics

The most basic options are simply contracts that allow you to buy or sell stocks at particular prices after a certain period of time.

For example, suppose we consider one share of Apple stock. Currently, that one share costs $147.65.

Now, let’s say you buy a 3 day contract that allowed you to buy that share of Apple stock for $150 when the contract expiries. You’re not *obligated* to buy the share of stock at this price, but you have the *option* to do so.

Well, let’s say the price of a share of Apple stock goes up to $155 three days from now when the contract expiries. Then you would definitely *exercise* your option to buy the share at $150 and sell it for a profit at $155.

Similarly, let’s say you buy a 3 day contract that allowed you to sell a share of Apple stock for $145 when the contract expiries. Again, you’re not *obligated* to sell the share of stock at this price, but you have the *option* to do so.

Well, let’s say the price of a share of Apple stock goes down to $140 three days from now when the contract expiries. Then you would definitely buy a share for $140 and *exercise* your option to sell the share at a profit for $145.

An option is the “option” to do whatever it says

Calls let you buy the stock for that price.

Puts let you sell the stock for that price.

Options are x100 shares.

Options also expire. As in the contract is only good until a specific time.

So example.

A call for starbucks expiring august 6th with a $120 strike price.

That means I can buy 100 shares of star bucks. No matter what price the stock currently is on the market for $120 a share. The only thing is. I have to do it before august 6th. Otherwise the contract is useless.

So if Starbucks shoots to $200 a share. I can buy 100 shares at $120 a share. Or just sell the contract for profit.

If it dumps to $10 a share. No one would want to buy it.

Options are riskier because they expire. If I bought stock instead of options I could just wait for Starbucks to go up. Instead I’m out whatever the price was