3 ms·
Only if you sell. Option buyers have a loss floor built-in.
by HappySweeney 8y ago
Only if you sell. Option buyers have a loss floor built-in.
- olliej 8y agoMy understanding of options was essentially that you borrow N shares of stock X with a promise to buy it back. You then sell your shares to get so many $$$ (much wow, such bankruptcy ;) ). Then later when the stock goes down you buy back N shares and pocket the difference, and use those N shares to pay back your loaned shares. The problem seems to come from selling your shares and then the stock unexpectedly (to you at least) rising so that buying back N shares costs you more money than you necessarily have. As far as I can make out the way people make “huge amounts” from options is going down that path. Are you saying that another common approach is to buy your options and instead bank on the value of the options themselves increasing? This is a legit non-sarcastic question as it literally never occurred to me to do this :)
- HappySweeney 8y agoWhat you are describing is short-selling. An option is a contract to buy (or sell, depending on the option) 100 shares of some stock at a set price, which expires at the end of a set day (usually the 3rd Friday). This contract costs some premium, which is lost if the option expires before the owner exercises it. You can indeed make a lot of money just holding the option until it is worth more, and it can jump several multiples of the original price, especially on unexpected price movements. As the option cannot have a negative price, your losses are capped at whatever you spent on them.