Know About What Is An Option Investopedia

A buyer of a call option hopes that the security from where the option derives, is going to move up.

That means that the stock or commodity that your options derive from-also referred to as underlying security-will move up. So, the buyer of this option’s got a right to control a bullish directional position of X number of the actions of the stock for a pre-determined period of time (since all options have expiration dates, ones are longer others shorter). Of course that comes with a price which is referred as ‘premium’ that usually costs less than the security itself. As for commodities, it pretty much works the same way, only this time you’ve got the control over a future contract also for a given period of time and a specified strike prices. Both the strike price and the due date are known beforehand, you never buy an option without knowing when it will expire and to what extent is the strike price. The buyer has no obligation whatsoever to exercise and buy the underlying stock/commodity. But the vendor, in other hand, has the OBLIGATION to sell it. So, there is limited loss potential-the price paid for the option-but it has an uncapped profit potential.

Then, the latter goes up and make a 100% profit! G R E A T! But, the other trade went bust and you lost 20 per cent of your initial money on the trade. The end result is said to have been that you LOST money even if you had one trade that made you a 100%.