What are Options
What is an option? An option is a contract that gives the buyer the right, but not the obligation, to buy a stock at
specific date at a specific price.
Here's a non-stock market example to explain an option:
Your neighbor has a boat that you want to purchase. It's a sailboat and you have a mental image of yourself sailing
around at the lake. You decide to buy it.
Bad news. The neighbor wants $10,000 for the sailboat, a price that you can't match. Because you really want the boat
(and he really wants to sell), you pay him $500 to hold the boat for six months. At that time you will pay him the
remainder you owe ($9,500) on the boat.
But wait. A month later a local newspaper discovers the sailboat used to be the property of JFK. He used it to
entertain Jackie, Caroline and JFK Jr. The value of the sailboat doubles overnight. It's now worth $20,000, maybe more.
But because you had an option to buy the boat for $10,000, the owner must sell it to you. The additional profit gained
by the boat's increase in value belongs to you, not the seller.
But what if the boat had been made of some sort of toxic material that causes cancer to everyone that touches it? Now
the value plummets. Nobody wants to touch this thing and you certainly don't want to buy it. Because the option gave
you the right, but not the obligation to buy the boat, you don't have to purchase it. You just walk away, although you
lose the $500 you paid the boat owner.
Stock options, an important part of a BetterTrades stock options education, work the same way. You can control shares
of stock at a fraction of their cost, but don't have the obligation to buy unless if fits your needs.
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