On a basic level what are options and options trading?
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An option is the right but not the obligation to act on something, usually at a set price within a set time period.
Example: Let’s say Amazon is trading at $100. A buy option (referred to as a Call) could be the the right to buy a share of Amazon for $110 anytime in the next 12 months. And it might cost me $10. So I pay $10 for sure right now. If the stock rises to $111 or higher, then I can exercise my right and buy it for only $110. If it doesn’t rise to $110, then I don’t exercise my option and nothing happens. If it goes to $140, then I can use my option, sell it for that and put the $30 (140-110) in my pocket, leaving me with a profit of $20 after the $10 it cost to buy it.
Options trading simply would be if a bunch of people get together and trade those options. You and I could do that right now: I think Amazon is going to tank next year, and drop to $80. I’ll sell you that right to ‘buy Amazon if it goes over $110 for only $5. You love Amazon and say deal, we write the contract and both sign. Tomorrow Amazon reports record profits and 3 department stores go out of business. We all agree Amazon is a now much better stock. You think instead of $5 it’s now worth $20. I think it’s worth $50. I offer you $25 and you accept. We just traded it.
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