Let's start with a story illustrating the nature of an option.
Someone dreamed of a plot by the ocean. Such a site is not only expensive but also rare. Getting on land markets, he instantly finds a buyer. Once, Someone, passing near the coast, noticed a man walking freely along the beach. Deciding that this is the owner, Someone asked to sell him land. The man agreed, voicing the price: one million euros. After making sure that the man was really the owner of the land he liked, Someone immediately began to lean toward a deal. The named amount for such a product was small, Someone understood this, but the man was not going to admit it, because the land really was worth more, and it took time to make a real estimate of the cost. Then Someone suggested: "I will leave you 10,000 euros in exchange for a receipt, which will give me the right to purchase this land within a month for a million euros. If I do not bring a million euros during this time, then you leave the money for yourself." The man agreed.
In the evening, Someone talked about buying a plot for people looking for a coastal zone for starting a business. As a result, the site was sold at 400% more expensive. Someone managed to earn a large sum on a product that he did not even own.
This deal could end like this:
1. Someone would acquire land, using his right within a month, and sell (resell) it again, spending additional resources on registration, renewal, taxes, etc.
2. Someone could sell a receipt (purchase right), earning 400% of net profit.
3. Someone could not use the right to purchase at all and lose their 10,000 euros.
We come to the concept of "options." What is it? In this case, this is exactly the right to purchase land within thirty days indicated in the receipt. This right (in the form of a receipt) has itself become a commodity, moreover, an independent product. In other words, what is bought can be sold. Actually, this is the nature of all call options.
Call option - the right to purchase an underlying asset at a predetermined price. Back to the story. Someone paid a man ten thousand euros for the right to purchase land within a month, therefore, a call option in this case cost 10,000 euros.
For options, there is an expiration date. In the given story - 30 days. Then the option will no longer cost a dime. Therefore, an auction call must be completed before the specified date, or sold.
This also applies to stocks. You yourself can buy shares using the call option, or sell this right on an option exchange. Typically, option buyers do not incur the costs and hassles associated with the exercise of purchased options, as is the main character in our story. After all, the purpose of the transaction is resale and income generation.
By the way, there are also “inverted” call options - option puts.
Options are new dimensions in market movements, and therefore they are difficult to quickly master. Let's say that two moves are possible with stocks: buy (long position) and sell (short position). These positions are mutually exclusive: either long or short. But with options, several actions are possible at the same time, but this is clearly not for lazy minds afraid of the complexity of option trading.
So, a call option can be, like a put option, both bought and sold. Moreover, it is possible to simultaneously stay in four positions in relation to one asset (optional spreads).
Put option can be illustrated by the example of an insurance policy. By purchasing it, you want to insure, for example, real estate. If this is a home insurance policy , then, in fact, you buy the right to sell the home to an insurance company at the N-th price, regardless of what happens in the future. But the law is valid under specific, specific conditions and a specific, specific time. Accepting money for insurance, the company undertakes, if necessary, to buy this house from you. The more you determine the validity period of the policy, the more money the insurance company will require, since over longer periods of time there is more risk and uncertainty. The same applies to put options: the higher the expiration dates, the more expensive they are. But the insurance policy is subject to conditions, but options do not. It is enough to fall below the strike price of the underlying asset. In addition, put options on stock exchanges can be sold to anyone, anytime, but no insurance policy.
Options, as you already understood, are a commodity. For investors, accustomed to a state of risk and profit, this is a great tool. It is thanks to option trading (and only it) that it is possible to increase the effect of movements in underlying assets without increasing risk. For those who are far from option trading and are sure that large profits are associated with huge risks and large losses, this statement is illogical. But options really give a chance to get the maximum possible return with good price movements, since their purchase entails disproportionately lower costs, and the risk is minimal. You can earn here only with the correct calculation of asset growth.