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  1. #1
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    Options (calls, puts, etc.)

    Trying to learn more about options before I just go out and buy a bunch of calls. I know that 1 contract = 100 shares. How is this hypothetical contract (of 100 shares) more valuable than just buying 100 shares of said stock to begin with? Can someone explain this in layman's terms? I was a Robinhood user but am switching over to Webull now. Vladimir Tenev's (Robinhood CEO) actions speak louder than his words
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  2. #2
    ♞Cheeky Ken....t♞ AverageKenneth's Avatar
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    Because you can buy and then sell the contracts so you don't need the necessary capital. Some brokers just allow you to automatically sell when you execute the contract too.

    *just an example with made up pricing*

    Say you thought Apple was going to hit $200 a share this year and you had a contract for $190 calls that cost you something like $100. Your outlay is $100 and if you're right you're selling for $9 a share, boom you've made $800 profit with a $100 outlay. If you were buying the shares at $125 or whatever they are right now, you're looking for $12.5k, not $100.

    Equally, you can exercise the contract and just keep the shares. Say Apple is at $125, you think it's going to hit 150 and keep going but there's also a chance the new iPhone will come across as a horrendous piece of ****, explode on stage killing Tim Cook in the process, and the price will tank. If you buy $130 calls, you've basically paid a premium to guarantee yourself those shares in the timeframe you pay for. The most you'll lose is what you paid for the contract, even if the price dips to $0.10. If the new iPhone turns out great and the share price looks good, you've just grabbed Apple shares on the up for $130 + the premium.

    Same goes for buying puts, but the opposite.

    As far as selling contract goes, for the love of fuk make sure you're covered. Naked calls you've sold have unlimited loss potental and unlike someone working for a hedge fund you're personally liable.
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  3. #3
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    There are so many different options strategies it would be too difficult to explain here. Your broker should have options resources on their website.

    But to answer your question about the difference between buying 100 shares and buying 1 call option for 100 shares:

    Buying 100 shares requires the full capital to buy all 100 shares now. There’s no time component to it.

    You can think of a call contract like a “non refundable deposit” or a “holding deal” on those shares. You can put down a small amount of capital for the right to purchase 100 shares of a stock at a later date at a specified price.

    - so if by that date, the stock price is higher than the strike price (the specified price you agreed to buy the shares) you would exercise your option and own the stock for a profit.

    - if the stock price doesn’t reach your strike price on that date, your option would expire and you would lose your premium (aka your non refundable deposit)

    So it wouldn’t matter if the stock was a dollar short of your strike price or if the stock went all the way to $0 and went bankrupt, you would still only lose your premium (aka deposit)
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    Originally Posted by simonsaysgoham View Post
    Trying to learn more about options before I just go out and buy a bunch of calls. I know that 1 contract = 100 shares. How is this hypothetical contract (of 100 shares) more valuable than just buying 100 shares of said stock to begin with? Can someone explain this in layman's terms? I was a Robinhood user but am switching over to Webull now. Vladimir Tenev's (Robinhood CEO) actions speak louder than his words
    Trying to learn also.. we need someone with knowledge and willing to give up their time to make a few stickies for this finance section that break down alot more than the info available here. Much better to learn when we can have Q&A/discussions

    EDIT: Unfortunately i am not the hero in this one!
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  5. #5
    Registered User woadito's Avatar
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    Anybody got a link that we can read up on?
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