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.
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