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What Are Options? | Options 101 Pt1

What are Options?

  • Options are interesting, because they seem insanely complex at first (and to some degree, they can be). But, after trading them for over 14 years, I've become quite familiar with them and sincerely, they're nothing too crazy. I'm by far not the brightest bulb in the box, so I imagine most of you will get it quicker than me.

  • I view options as a strategic investment - meaning they are more dynamics than holding a normal equity position where we make money when they go up and lose when they go down.

  • So why trade options, they're risky right? Sort of. Like most things in life, things are rarely binary. Options can ABSOLUTELY be risk - as can any other investment. Options can also REDUCE risk. It all depends on how we use them. They can be incredible tools to amplify returns.

  • Options are similar to the deed of a house:

    • A deed to a house grants the holder of the deed, the right to a property. Options are very similar.

    • The deed to a house is worth no more than the paper it's printed on. The value of the deed is DERIVED from the underlying asset it grants ownership to. Same for options.

  • Options are derivatives. Their value is DERIVED from an underlying asset (think stocks, ETFs, bonds, etc).

  • They contracts between 2 people. So for every option contract (called Lots), there is a buyer and seller.

That's all for this week but if you want to speed ahead on learning about options, you can checkout my playlist on them here! I recommend going through in order.

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