Ok I have read and read and read and still don't understand what an option is.

[ayande]

I must be fumb because I have read and reread what an option is.

Can someone break it down in layman terms what is the difference between trades, options, and futures?

You can think of an option just like an insurance contract: If I think a stock may go up, I buy the right to purchase it at stated future price. The reason I'd do this is because the price I pay is at a discount to that future price, in exchange for taking on the risk that my option may expire worthless if the stock doesn't reach my target.

Selling options is similar: You're selling insurance to other people, who wish to capitalize on future market conditions.

What makes options more complex than, say, futures, is that the price of an option changes due to many factors: variations in the underlying's price, the advance of time towards the expiration date, and changes in volatility that roughly reflect people's aversion to risk.

John

 

[misterkel]

I must be fumb because I have read and reread what an option is.

Can someone break it down in layman terms what is the difference between trades, options, and futures?

Oh, you're not fumb, fon't be so fard on yourfelf, my food man.
(insert smiley emoticon and I couldn't resist apology).

 

[misterkel]

I think I understand it now guys. Thanks. If I'm understanding it correctly an option is the downpayment on a stock with the option to buy at a certain date. I can also forget my downpayment and walk away from if it I want but I loose the downpayment. If the stock goes up I can still buy it at the price that was agreed on.

Does that sound right.

Or it's an internet monkey feces fight, as most threads on ET are.