An option is as it sounds, you put money down today giving you the option of buying or selling something at a specified price during some future time period. For example, I might pay $10 today to hold a $50 ticket to a concert being held next week. I have no intention of going, I am entirely indifferent about the band, but I believe prices will increase due to high demand and there is a chance to make a big profit. To be clear, when I show up I will still have to pay the full $50 for the ticket, the $10 premium just gives me the option to do so.When I show-up at the concert, the ticket will be waiting and I pay the $50 for the ticket. If I don't show up, I lose the $10. The $10 is the price of the option and the $50 is the strike or exercise price. If on the day of the concert prices go up to $200, I can exercise the option, get the ticket for $50, and resell the ticket for a $140 gain.

But what if the price unexpectedly falls to $40? Then I would not want to exercise the option. If I do, I will lose $10 on the resale of the ticket and $10 on the option for a total of $20. In fact, for any price less than $60, I would be unwilling to exercise this call option (a call option is the right to buy, a put option is the right to sell at the strike price during the specified period). Stocks and other financial assets work the same way. I purchase the option to buy or sell a stock during some time period in the future at the strike price.

Tip : Economists View

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