How is trading options different from buying and selling stocks?
In: Economics
A Pokémon card may be worth $10 today. I could buy it and if the price later goes to $12, I can sell it for $12 and make a $2 profit (20%). That is like buying and selling a stock.
Say instead of buying the card outright, I make a deal with someone who owns the card. I say, “I’ll give you $1 right now just for the right to buy the card at $10.50.” The owner says “ok but you have to decide by the end of the week if you want to buy it or not at that price.” So at the end of the week if the price is still at $10, I don’t cash in my deal because there’s no reason to buy it above asking price. I still lost $1. Alternatively, if the price is at $12, I’ll cash in the deal and buy his card for $10.50. I then own the card. If I want, I can turn around immediately and sell the card for $12 (the current price) to make a profit of $12 – $10.50 – $1 = $.50 or a gain of 50% (of the $1). This is one way options are used.
TLDR: The main difference is for stocks, you own actual shares of the company. For options, you own contracts with other people for rights and obligations to buy or sell at certain prices.
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