What the heck is an option and why do we want to sell these things?
I like to think of an option as a coupon. Let's say you are thinking of buying a watermelon in the not too distant future. And you think that the price of watermelons is going to increase. So you want to lock in today's price.
In this case, I agree to sell you a coupon (option) to buy a watermelon from me for $1.00 which is today's price. But I will charge you 10 cents for this coupon and it expires in 90 days.
Let's say 89 days go by. Your coupon expires tomorrow. If the price of watermelons is more than $1.00 and you still want your watermelon you should use the coupon. If the price of watermelons is below $1, you should forget the coupon and just buy a watermelon at the market price. This will allow the coupon to expire worthless and I would make a nice profit of 10 cents.
But what if you didn't want the watermelon but the price went up to $2. You could either buy the watermelon yourself using the coupon and sell it to someone else for $2, making you a nice 90 cents profit. (Remember you paid 10 cents for the coupon.) Or you can sell the coupon to someone else, for $1, also making you 90 cents. Either way you win, and I lose.
It's the same with stocks. Thousands of stocks, indexes, and ETFs have options available to trade. Options are gaining in popularity because of the immense leverage. In our example, all you have to invest was 10 cents to control $1 worth of watermelon.
Let's look at our example above again. You buy an option for 10 cents, and you later can sell that option for $1 making you 90 cents. That's a 900% return on your money. If instead you had bought a watermelon at $1 and sold it later at $2, you would have made $1, or 100% return. 100% is great, but not compared to 900%.
What about me, the option seller?
To see how the option seller makes more money than the option buyer...
This lesson continues at: https://www.optiongenius.com/lesson-1
Happy Trading!
Allen Sama
P.S. Ready to start selling options? Join me at: OptionGenius.com
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