Explain the options with concert tickets!
Lately, there's been a surge in folks on moomoo diving into options trading. But for those just stepping into the game, understanding what options are and how they work might still be a bit murky. ![]()
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Funny enough, I've been in the thick of it lately, battling scalpers for concert tickets. And in the midst of those trades, it hit me: with demand outstripping supply, it's more akin to futures or even options trading than just a simple concert ticket purchase.
Options are financial derivatives. As the name implies, they grant the holder a right—the right to buy low or sell high. But to gain that right, there's a cost involved, known as the option premium.
Now, let's take a look at using concert tickets from different singers to discuss the classification of options and how to trade them:
1. Call Options
Justin Bieber's set to hit the stage in Macau, but scalpers have cornered the market on tickets, leaving John empty-handed. Eyeing the steep prices from scalpers, John's keen to buy but wary of rising costs.
Enter a scalper offering a lifeline to John: "I've got tickets in section C for $2000. You can have one, and if you're short on cash now, no worries. Just settle up 7 days before showtime. Plus, I guarantee that regardless of any price hikes, you can still buy from me at $2000."
But, scalpers aren't running a charity. John needs to cough up $100 upfront to enjoy this privilege.
$100 is the option premium, which is a call option. $2000 represents the option exercise price, and 7 days before the concert marks the expiration date.
John ponies up the $100, sealing the deal!
Come Justin Bieber's concert day, with his immense popularity, tickets in section C soar to $3000. John wastes no time finding the scalper and buys the ticket for $2000. The act of paying $2000? That's exercising the option.
Scalpers can't back out. Having pocketed $100 option premium from John, he's entitled to exercise it, and the scalper must honor the contract. That's their obligation.
In a different scenario, if Justin Bieber lands in hot water and tickets go unwanted, plunging to $100.
John's relieved he held off buying. With tickets cheaper now, that $100 option premium is water under the bridge.
At this point, the scalper approaches John, looking to sell at the pre-agreed $2000. John's not having it: "Who are you? What's this about? $2000? Tickets are going for $1000 now. Why would I buy from you?"
Scalpers find themselves at a loss. While they're obligated to sell at $2000, they've no right; that's in John's hands. Don't forget, John shelled out $100 for that privilege.
In essence: Option buyers (like John) shell out the option premium and gain the right to choose to trade at expiration. Option sellers (the scalpers) rake in the option premium and must fulfill their end of the bargain at expiration. If the buyer opts out of exercising the right, they pocket the option premium; if they do, they must facilitate the transaction.
Let's illustrate with a real-life trading example:
$Tesla (TSLA.US)$ is currently priced at $274. Believing Tesla will rise in the next half-month, I buy a call option with a $290 strike price expiring in half a month. The option premium is $155 ($1.55 * 100).
If, after half a month, Tesla's stock jumps to $300, I can choose to exercise and buy at $290, making $10 per contract. But if Tesla falls to $280, exercising means buying at $290, resulting in a $10 loss per contract. So, I'd skip exercising and just forfeit the option premium.
From the scalper's standpoint, if Tesla's stock climbs, they're on the hook to facilitate the transaction and lose $10 per contract. But if Tesla dips and the buyer opts out of exercising, they pocket the option premium.
2. Put Options
Switching gears, let's look at another scenario. Taylor Swift's gearing up for a concert.
John snags a ticket for $1000 but frets that if demand fizzles, tickets could go unsold, and prices might plummet. So, he seeks to hedge his risk.
Where there's demand, there's a market. A scalper bullish on Taylor Swift's tickets vows to buy at $900, no matter the price later. That's a put option.
But scalpers aren't philanthropists. They demand $50 upfront from John to enjoy the right to sell at $900. That $50? That's the option premium.
John reckons, if tickets tank to $600, the scalper's still on the hook to buy at $900. So, shelling out $50 upfront makes sense, and the put option deal is sealed.
Sure enough, as the concert draws near, Taylor Swift's tickets are still up for grabs, and prices are sliding. John spots tickets selling for $700 and swiftly finds the scalper. Armed with the contract, the scalper begrudgingly buys the ticket for $900.
After all's said and done, John effectively snags the ticket for $850 ($1000 + $50 - $900 + $700), cheaper than the original price, salvaging some losses.
In another twist, just before showtime, Taylor Swift announces her retirement after this concert. Ticket prices skyrocket to $2000, and they're nowhere to be found.
Now, the scalper wants to sell the ticket to John for $900. Naturally, John balks: "Who are you? What's this about? $900? Tickets are going for $1000 now. Why would I buy from you?" This is the abandonment of exercise rights of options.
The scalper's obligated to sell at $900 but lacks the right; that's in John's hands. And don't forget, John forked over $100 for that privilege.
To sum up: The agreed-upon $900 sets the option exercise price. John's proactive move to hold the scalper accountable? That's exercising the option.
Here's another practical trading example:
$NVIDIA (NVDA.US)$ is currently priced at $439. I believe it'll drop in the next half-month, so I buy a put option expiring in half a month with a $420 strike price. The option premium is $223 ($2.23 * 100).
If, after half a month, NVIDIA's stock dips to $400, I can choose to exercise and sell at $420, pocketing $20 per contract. But if NVIDIA climbs to $459, exercising means selling at $420, resulting in a $20 loss per contract. So, I'd skip exercising and just forfeit the option premium.
From the scalper's perspective, if NVIDIA's stock falls, they're obliged to facilitate the transaction and lose $20 per contract. But if NVIDIA rises and the buyer opts out of exercising, they pocket the option premium.
So, that's the breakdown of options and their trading patterns. Seems straightforward, doesn't it? The essence lies in simplicity; often, the most complex products only need a simple explanation. But to profit, merely understanding these basics isn't enough.
Putting an elephant in a fridge only takes three steps, but where to find the elephant, how to get it to the fridge, what size fridge to choose, what temperature to set... all these details need to be planned in advance. Investing is no different.
That wraps up this introduction to options. In fact, there are many other trading strategies to make money with options. I'll continue updating when I have time.
Feel free to leave your views in the comments. Let's have a friendly exchange!
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Some famous words of Buffett. I hope it's useful to you. : )
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Buddahs World : thank you!
Andre88888888 : Just a little input, avoid buying weekly options as time is working against you. Buy options that expire 2weeks and above to slow down theta decay if you are planning to scalp![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
EnjoyTheProcess : Just to let u know, I read through the whole article, and I appreciate your sharing using relatable analogy and clear concise examples.![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
Thank you!
聚财树 : Thank you
爱发财 Andre88888888 : It depends the volatility, the longer period the more expensive premium
ewsed 爱发财 : Thanks for the detailed sharing!
郎宝金银 : for both put and call options, who have the actual stocks in hands before the contract expires?
CowJumpedOverTheMoon : My favorite part is where $NVIDIA (NVDA.US)$ is currently $459![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
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Seriously though, excellent job! Next, please explain how to read those options charts. I can’t wait!
STD0313 郎宝金银 : Before it expires, no one. It is just a contract with conditions that must be met by a pre determined date. I would say 80% of option contracts never make it to the point of actual shares changing hands. Most are sold for profit or loss before expiration.
STD0313 : Thank you for the break down. It was a well written analogy
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