3 ms·

I don't have the money to lose if the stock goes up.

• baddox 13y ago
  And that just means you aren't actually that confident about your prediction, just like the rest of the market.
  • Nrsolis 13y ago
    BOOM. The price of that uncertainty is what you capture in the options pricing model. aka. "premium" Two scenarios: (Short-selling) AAPL: Sell 10 lots (1000 shares) short -> now you OWE someone 1000 shares but have the cash in your account of 1000 shares worth of AAPL stock. The next day, AAPL loses 99% of its value, you buy the shares back at their now 1% value, deliver them to the person you borrowed them from, and keep the rest of the cash in your account. OR, the next day, the shares DOUBLE, and now you owe that person shares that are worth twice as much as you got selling them in the first place. Bad news. Nearly 100% loss on the trade. (Buying a Put Option) You buy 10 AAPL PUT contracts (100 shares each) "at the money" (strike price equal to the last sale of AAPL) for $XX that expire at some point in the future (lets say one month). Anytime between now and then, if the price of AAPL doubles, your PUT OPTION may most-likely will be worth more than what you paid for it and you can sell it for whatever the market wants to pay for it. If you do nothing, at the end of 30 days, your option is worth exactly ZERO. The difference in the price movements of the underlying securities in both scenarios is what makes up the premium you pay OVER AND ABOVE what the difference is between what the security trades at and the price you paid for that "option" on the security.