For example:
Company XYZ in trading at $25 per share and you believe the stock is headed up. You could buy shares of the stock or you could buy a call option. Say a call option giving you the right, but not the obligation, to buy 100 shares of XYZ anytime in the next 90 days for $26 per share could be purchased for $100.
If you are right and the stock rises to $30 per share before option expires, you could exercise your option and buy 100 shares at $26 per share and sell them for an immediate profit of $3 per share ($30 - $26 = $4 - $1 for the option = $3 per share profit).
You could also simply trade the option for a profit without actually buying the shares of stock.
If you had figured wrong and the stock went nowhere or fell from the original $26 per share to $24 per share, you would simply let the option expire and suffer only a $100 loss (the cost of the option).
Company XYZ in trading at $25 per share and you believe the stock is headed up. You could buy shares of the stock or you could buy a call option. Say a call option giving you the right, but not the obligation, to buy 100 shares of XYZ anytime in the next 90 days for $26 per share could be purchased for $100.
If you are right and the stock rises to $30 per share before option expires, you could exercise your option and buy 100 shares at $26 per share and sell them for an immediate profit of $3 per share ($30 - $26 = $4 - $1 for the option = $3 per share profit).
You could also simply trade the option for a profit without actually buying the shares of stock.
If you had figured wrong and the stock went nowhere or fell from the original $26 per share to $24 per share, you would simply let the option expire and suffer only a $100 loss (the cost of the option).
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