What the F**k are Stock Options?
Summary: What the f**k are stock options? Options are one of those personal finance concepts that can be intimidating if you aren’t familiar with it but when distilled down, is pretty straightforward. Our guest today, Kal Zurn, from <a href="https://www.sharpertrades.com/podcast">Sharper Trades</a> will break down what stock <a href="https://www.listenmoneymatters.com/diversify-investments/">options</a> are, how they work, what they are used for and why you should care.<br> What Are Your Options?<br> Put simply; stock options are a contract between two people. Think of them like making a bet on a football game, two people bet $20, one wins, and one loses. When dealing with options, one bettor is the buyer, and the other is the seller. What you’re betting on is the likelihood of a future event.<br> A stock option gives the holder the right to buy or sell 100 shares of an underlying stock at a certain price, called the strike price, on or before the expiration date of the option. One option is equal to 100 shares. The holder is not obligated though to buy or sell the option. If the option isn’t executed before it expires, it’s worthless.<br> Stock options are <a href="https://www.listenmoneymatters.com/natali-morris-the-power-of-leverage/">leveraged,</a> that’s why they are cheaper than buying actual shares of stock. One share of stock X costs $100, but you can buy an option for $10. You don’t own the shares; you control them. The options have an expiration date, that’s why they’re cheaper than owning actual shares.<br> Check out this video for a quick crash course on today’s topic.<br> <br> Learn the Lingo<br> Strike Price: The strike price is the price at which the option holder can buy or sell the underlying security when exercising the option.<br> Call Option: A call option contract gives the holder the right to buy 100 shares of stock at a specific price within a particular time period.<br> Put Option: A put option contract gives the holder the right to sell 100 shares of stock at a specific price within a specific time period.<br> Expiration: This is the final date an option can be traded. Most contracts are short-term, less than one year. Longer contracts are called LEAPS.<br> How Does This Make Money?<br> Options allow traders to hedge their stock positions. They allow investors to take a leveraged positions on a stock and hedge the risk of the full price of buying shares.<br> An option buyer thinks the underlying stock will go up and the seller thinks it won’t. This is the two sides of the bet. The call option holder makes money when the strike price is less than the current market value of the underlying stock. The put option holder makes money when the strike price is higher than the current market value of that stock.<br> If you bet right, you make money.<br> Lock it In<br> A good example of options in the real world is an airline buying oil options. Fuel costs are an airline’s most significant expense when oil prices rise, their profits go down. To hedge against high oil prices, airlines buy options, which gives them the right to buy oil in the future for a price that is agreed on today.<br> If the price of oil goes higher than the agreed-upon price, the airline makes money; they won the bet. If it goes lower, they lose money; they lost the bet. But even if an airline is on the losing end of the bet, they were still able to budget their fuel costs because they had locked in the price. The airline may not make a profit, but they can control their losses.<br> You’re Not an Airline<br> Are stock options something you should jump into or are they just for big corporations? After all, options are betting on the future, and none of us can predict the future. When you buy shares of stock, you’re betting that the price will go higher one day. That’s the only thing you have to predict.<br>
