Eli5: what is a buy and sell option trade, could anyone explain this clearly?
In: 2
If you follow r/wallstreetbets you’ll see it’s actually an option to lose your life savings and home.
An option is a contract you pay for to buy a share at a future time.
Apple is (imagine) $10 today. You want to make a contract with me to buy an Apple share at $10 on Monday.
Not a problem, I wasn’t selling anyway. Give me $1 and I’ll give you that contract. Now I buy another Apple share at $10. Come Monday, when I sell you the share for $10, it doesn’t matter what happened to the price, I’ve got the same number of shares and made $1 by selling the contract.
You’re betting on the market. If Monday comes and Apple is $20, I have to sell to you for $10 per the contract. It cost you $1 for the contract so you’ve made $9.
Great, but why not just buy the share at $10 in the first place?
Well, you only have $10. What you’re going to do is buy 10 option contracts for $10. Now come Monday your $10 investment is worth $200.
But you’ve spent your $10, how do you buy those shares you’ve committed to buying?
Well don’t. Just sell the contracts. The contracts are now worth $200, someone will buy them for just under $200 and make a bit of low risk profit.
Ok Great, so you bought those 10 options but now Apple is worth $5 on Monday. You need to pay me $100 for those shares today and nobody will buy your contracts for more than they’re worth. You can sell them for near $50, but you also just spent your last $10 last week to get those contracts. Uh oh. You’re in trouble now.
Latest Answers