How do stock futures get a value assigned to them when we can’t even tell where a stock is going the next hour? And why/how do people buy them (financial product wise)?
In: Economics
with stocks, you’re probably talking about options. You can buy or sell the option to buy or sell a stock at a given price until a given date. For example, if you have a stock that’s currently trading at $50, you could buy the option to sell it at $40 one month from now, so if it crashes to say $25, you don’t lose half your money, just the $10 per share plus the price of the option. Or you could sell the option to buy it at $60, if you sell this option for $1, then you make a dollar regardless of happens from the sale of the option, and you have to sell the stock for $60 if the person that bought the option exercises it. So you’re making money as long as the price of the stock doesn’t increase to more than $61, but missing out on some of the upside if it does go higher than that.
The pricing is determined by the price of the stock compared to the strike price of the option, the time until it expires, and the expected performance and volatility of the stock.
People also buy and sell options without owning the stock in question. For example, if you think a $50stock is going to go down a lot, you might buy the option to sell it at $40. So if the stock goes down to say 25, you can buy it for 25 and then sell it immediately for 40. Similarly, you can sell options to buy a stock you don’t own, but if the price goes up, you’re still on the hook to deliver it at the agreed price, so you can lose a whole lot of money this way, and your broker might not allow you do this.
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