I will give you a simpler example using fruits to explain it



Say that you want to buy 100 Apples
Each Apple costs .10 cents, so the total cost is 10$ dollars
But you say... wait a minute, I don't want the apples right now.. I was them a month from now , but you fear that a month from now the apples will cost .25 cents each instead of 10 cents..

What can you do????

You ask the seller, to promise you to sell you the apples in the future for that same price of 10 cents.. and the seller says... ok fine, but you must leave a collateral so there is certain assurance that you will pay for these apples a month from now..

You say fine.. I'll leave 1 dollar as collateral

That becomes the contract, this contract costs 1$, you own that contract and if you decide not to buy them later, that's fine because the seller at least made $1. There is always a chance that the apples won't go up in price at all or even that the price could go down to 8 cents.


Say.. you are in the middle of the month.. and you decide you don't longer want the apples.. and on top of that, the apples prices sky rocketted to .50 cents because there had been a virus and the supply had shortened

So the 100 apples now cost 50$ dollars

Since you don't longer want them anyway, you can sell the contract to someone else who wants them.

This other person that buys the contract from you.. thinks that the apples will cost $1 each by the time the month is completed.. so they are fine with paying you a premium for the contract that once cost you $1, he is willing to pay you $8 for that contract

So you profited $8 , or 700% your initial investment of 1$

The apples contract now belong to a different individual and you walk away with money without even having to buy the apples, which price is still promised at. 10 cents.

The month completes, the apples end up costing .60 cents, this other person made 10$ because it's 100 apples x .10

Now the person has the option to use the contract to buy the apples and only pay .10 cents for each, while the value is .60. Or the person can resell the contract to someone else who may want the apples

So a contract can change hands many times if the owner of the contract wants to sell it.

Now if the apples prices go down because 3 new apple stores opened around the corner, then the price would now be .15 cents , this person paid $8 , so this person lost money in that contract.

So there are things to keep in consideration when buying contracts, such as how certain you are of the stock price change.

If the value had gone in the first two weeks to .05 cents, you still have to pay the .10 cents. Yes you can also lose money.


Now, there are the Greek factos.. if the contract is under the brake even price, the contact will be subject to further fees, such as theta , and implied volatility
So if the price of the apples go down too much, it could be rendered worthless, and you would lose that 1$ because there is no point in buying apples at .10 if they now cost 0.02 cents


That is basically how options work... this is still simplified but that's most of the gist


The biggest losses cold be these that paid premium thinking that the asset would go up high. If it does go up high, they make serious dough

There are also options contracts that can be bought in reverse and only benefit you of the price goes down. Same basics apply.
These are called puts

If you are fairly certain a stock will go up (or down) you can make serious money buying options. There is such a high risk if it does not go your way though.