Did you know if you own a car you own a put options? That’s right. And since many people reading this post own a car, then all of you own a put. So the idea of trading options in no more difficult to understand than pressing the start button on your favorite vehicle.
So, what do I mean, if you on a car you own a put?
When you own a car, you need to buy insurance to protect you from a catastrophic loss. You buy insurance and pay a premium for a specific period. If you have an accident, you have the right to be made whole by the terms of the contract. The max loss the policy owner (put holder) suffers is the premium paid to buy the policy.(put contract)
This is exactly the same as a put contract.
When you buy a put on a stock you own, if the stock losses value and falls below the strike price of the contract, you have the right to sell at the strike price and suffer no further loss. The price you pay for the put is the premium. Same as insurance.
On the other side of the contract/ insurance policy is the option seller (insurance company).
The seller receives a premium and assumes the risk of loss in the same way that the insurance company assumes the risk of a car accident.
If no accident occurs, the put seller (insurance company) is entitled to keep the premium. At the inception of the policy, the insurance company signed an agreement committing to the terms of the contract. When a put buyer opens a long put contract, the put seller agrees to assume the risk that the price of the stock will fall below the strike and have to buy the shares from the contract holder.
It’s a very simple reality and one every automobile driver engages in millions of times each year.
Now you can see what I mean. When someone tells you options are risky, ask them if they feel they are taking a big risk owning an insurance policy on their car.
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