Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset such as a stock at an agreed-upon price and date. Each option contract will have a specific expiration date by which the holder must exercise their option if they choose to do so. However, the holder is not required to buy or sell the underlying asset. If they do not opt to exercise their option, the contract simply expires at its set date without a transaction having taken place.
There are two forms of options:
Options contracts usually represent 100 shares of the underlying asset, and the buyer will pay a premium fee for each contract. This premium is partially based on the strike price—the price for buying or selling the security until the expiration date. Another factor in the premium price is the expiration date. If the strike price is very far off the price at which the security is currently trading (i.e. if it is “out of the money”), then the premium to be paid on the contract is likely to be very cheap.
Options contracts are a relatively cheap way to move large sums of money, as they can be used as leveraged products, i.e. you can move more money than you currently have at your disposal. Purchasing $1,000 worth of options contracts on a stock, for example can provide much more return than investing these $1,000 in the stock directly. However, options contracts usually are short-term bets that—if exercised exclusively—are opposed to a sensible long term investment strategy. The option contract strategy becomes especially risky if leveraged with borrowed money and can amount to enormous losses.
As options contracts are complex products, it is advised to handle them only with sufficient experience. However, the discount broker Robinhood has frequently been criticized as unethical for incentivizing inexperienced traders to trade options, as the company makes larger profits off of its customers for these types of transactions.
Options contracts (with borrowed money for extra leverage) are a preferred way of YOLOing on the Wall Street Bets forum.
Worth mentioning in this context is the “Infinite Money Cheat Code,” a glitch in Robinhood’s app discovered in 2019 that allowed users to borrow infinite amounts of money, thus being able to trade with infinite leverage. Both enormous profits and enormous losses were booked by exploiting this cheat. User u/ControlTheNarrative who discovered the glitch and shared it on the forum Wall Street Bets writes: “I (...) use my increased buying power to maximize my gains.” Simple as that. However, the user also became infamous for losing approximately $45,000 in one and a half minutes on Apple put options in October of 2019. He was immoratlized in the “GUH”-meme.
Sources:
Internal
External