It is poorly worded , a poor example. and incorrect. If you buy a stock options contract good for 1year you pay the entire premium/ price up front
https://yippy.com/search?query=what+an+option+is. https://yippy.com/search?query=Can+...erence+between+trades,+options,+and+futures?+ read some more?
A future is a promise to buy or sell an underlying at a certain price by a certain end date. An option is the right to choose whether to promise to buy or sell the underlying at a certain price by a certain end date? Lol, I realize it makes zero sense, that last one, but that is how I see it in my head. Which is why I do not trade options. The fack is with those things.
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.
The Foot In simple terms: Option Buyer gets the right to BUY ( CALL option) or SELL ( PUT Option) an underlying asset (to keep it simple a stock) but has no obligation to do so. So his/her max risk is the "Premium" he pays to obtain that option. There are few other factors in it like strike price/ expiry/ style of exercise etc + lot of math behind what makes option price.. please read up on CME website So Stock trading @$10 If you purchase a CALL option with a strike of$10 expiry in 3 days/ 3 months whatever duration you pay a certain amount of premium upfront. as simple as that. Once you understand CALL and PUT buying then think o/P and understand what "Option selling" is and then perhaps Option spreads etc.. it starts getting complex then on There is ton of material available on Options on the net