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You just held an option.
You know the drill. The store runs out of the thing on sale, so they hand you a rain check. Come back within 30 days and you can still buy it at $4.99, no matter what it costs by then.
That's not "kind of like" an option. That IS a call option, piece for piece:
• The right to buy something • at a locked price (the strike) • before a deadline (the expiration) • for a small fee up front (the premium; the store hands rain checks out free, the market never does) So if the item doubles in price, your rain check just got valuable. If it goes on clearance, it's worthless. But look at what you actually lost. The rain check. Not your wallet. The most a call buyer can ever lose is the premium they paid. If you only take one sentence from this course, take that one.
The other contract is the put. Same idea, flipped. A put is the right to sell at a locked price. It's price insurance. You own something, you're worried it drops, you pay a little for the right to sell it at today's price no matter what. Quick question before we move on. Who makes the money in insurance, the buyer or the company? Keep that in mind this week. The desk is usually on the company's side.
Ok, two more things and I'll let you go:
• One contract covers 100 units. A premium quoted at $1.85 is $185 in real money. So when you see us post −$185, that's the whole position, in cash. • SPX settles in cash. SPX is the S&P 500 index itself. No shares to deliver, ever. When an SPX option expires, the wins and losses just settle in dollars. Nobody wakes up to surprise stock in their account at 2 a.m. That's the whole lesson. A call is a rain check. A put is insurance. The premium is the most a buyer can lose. Everything else in options, every structure with a fancy name, including the butterfly this club is named after, is just these two contracts stacked in different ways.
Tomorrow I'll show you the one picture that reads any options trade in five seconds. Even the ugly ones.
Into the close,
The Desk
P.S. Tomorrow's chart is the same one on every trade card we post. Learn it once and you can audit everything we do.
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