On a basic level what are options and options trading?
In: 1
Imagine you’re a farmer. You want to plan for the year and choose crops prudently. Unfortunately prices go up and down like a yoyo so you want certainty for harvest time. After all your overheads are fixed, why not your revenue? So you agree a price with a broker as you plant the seeds for a price for your crops to be completed at harvest time.
This is a future and both parties are locked into a future fixed price and quantity.
A similar contract is an option where a contract is made, but the broker can choose not to buy the crops at harvest time, especially if the contract price has risen above the spot price.
You walk up to a gambling table and lay down $3 to bet that the stock of choice will go higher than $50 within the next 10 minutes. They take your $3 and spin the wheel of possibilities. If the stock price goes higher than $50 before 10 minutes expires then you get to keep the total difference between $50 and the max price it reached. If 10 minutes expires without going higher than $50 then you just lose the $3. That is how call options work.
A put option is the same, but you’re betting the stock price will go below, not above, $50.
Really it is just a sanctioned game of California High-Low.
Realistic option contracts will normally have an expiration of days to months, not 10 minutes.
You walk up to a gambling table and lay down $3 to bet that the stock of choice will go higher than $50 within the next 10 minutes. They take your $3 and spin the wheel of possibilities. If the stock price goes higher than $50 before 10 minutes expires then you get to keep the total difference between $50 and the max price it reached. If 10 minutes expires without going higher than $50 then you just lose the $3. That is how call options work.
A put option is the same, but you’re betting the stock price will go below, not above, $50.
Really it is just a sanctioned game of California High-Low.
Realistic option contracts will normally have an expiration of days to months, not 10 minutes.
You walk up to a gambling table and lay down $3 to bet that the stock of choice will go higher than $50 within the next 10 minutes. They take your $3 and spin the wheel of possibilities. If the stock price goes higher than $50 before 10 minutes expires then you get to keep the total difference between $50 and the max price it reached. If 10 minutes expires without going higher than $50 then you just lose the $3. That is how call options work.
A put option is the same, but you’re betting the stock price will go below, not above, $50.
Really it is just a sanctioned game of California High-Low.
Realistic option contracts will normally have an expiration of days to months, not 10 minutes.
Latest Answers