@Cobalt @Cornel @Betguardian it looks a bit overwhelming when you start with it. I totally get that. I had the same impression when I started.
In the end though, it’s quite straight forward. Especially with call options, which I’ll explain briefly.
When you BUY a call option, you pay a premium to buy shares at a fixed price on or before a specific date. For example, you buy a call option that expires 20 January 2023 (after that date the option cannot be sold to others and also can’t be used by you to buy shares) with a strike price of $10 (strike price is the price you will pay for a share when you execute the option in the future). The premium for the option in this example is $4. Generally options represent 100 shares. So buying one call option gives you the right to buy 100 shares. That means the premium is $400 (100 x $4).
This also means that your break even point is $14 (share price + premium). So when the share price is above $14, you won’t make a loss.
So, let’s say the share price hits $23 and you want to execute that option. You still pay $10 per share, according to your option contract. You can also choose to sell your option to other traders, which can result in even larger profits as the premiums are determined by ‘the Greeks’; a set of factors (such as time, price volatility, etc.). So, the premium could in theory result in a higher profit than executing the option (buying the shares at the strike price) and selling those shares at the market price.
You can also SELL call options (‘writing’ call options), which means you are obligated to sell your shares to others at a specific price on or before a specific date, if the buyer of your call option tells you to do so.
You can also BUY puts, which is basically an insurance for your shares. You pay a premium for the right to sell your shares at a specific price on or before a specific date.
You can also SELL puts (‘writing’ puts), which means you provide that insurance to others, giving you the obligation to buy shares from others at a specific price on or before a specific date, if the buyer of your put option tells you to do so.
And then there are Warrants and Futures, but I won’t go into that here. They’re much like options, but there are some important differences that set them apart from options.