To The Moon

Hi, everyone! I am Options Tutor, and I will share basic information of options and how to trade options in following posts. If you have any options questions, welcome to @OptionsTutor. It is my pleasure to help you solve the problem!

Let's talk about what is options now.

In academic way, An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset.

OptionsTutor says an option is to pay a fee to obtain the corresponding rights, the buyer obtains the right, and the seller needs to perform its obligations.

For example, there is a house worth $5million. Jack wants to buy this house, but he does not have enough cash now. He worries that the price of the house will increase in the future. At this time, he can sign a contract with the landlord, agreeing to have the right to buy the house at the current price within half a year, but he needs to pay $0.1million as the landlord’s cost of fulfilling the contract at the same time. In options, this $0.1million is the premium, and this contract is an option contract.

There are two main ways to make an option profit, one is to exercise the option at expiration, and the other is to transfer the contract before expiration.

1. Exercise the Option at Expiration

Suppose the house price rises to $6million before the contract expires. Jack has signed the contract and paid the premium, he can buy the house at the price of $5million, plus the $0.1million premium paid before, which is equivalent to paying $5.1million, which is $0.9million cheaper than the current price.

Suppose the house price falls by $4million before the contract expires. Jack paid the premium to obtain the right to purchase, but the rights may not be exercised. Therefore, Jack's maximum loss is $0.1million. In the stock market, even if you buy an option and lose money, you can stop the loss by closing the position in time, instead of the contract to expire.

An important feature of options is that the buyer obtains the right and own the right not to exercise. As the seller, he has to perform his obligations.

2. Transfer the Contract Before Expiration

Suppose the house price rises to $6million before the contract expires. Jack still does not have enough cash to buy a house. At this time, he can transfer this right. If Jack transfers at a price of $0.7million (the transfer price is determined by the supply and demand and the actual value), Jack will earn $0.6million, and the rate of return Is 600%. Those who purchase Jack's contract can buy a house of $6million for $5million, at a cost of $5.7million, which is $0.3million cheaper than original price.

Suppose the house price drops to $4million before the contract expires. This contract has no value.

If you have any questions, @OptionsTutor in the comment area! I will bring more posts about options later.