We noted when reading an article on the BBC about 'fat cat' pay checks and how some things do not work whilst others do to curb pay it gave an explanation of something that we thought was an ideal way to explain stock options
According to Aristotle, in ancient Greece, Thales Miletus (a philosopher) – basically a thinker, fortune teller and star gazer was asked why he had no money if he was so good at thought and predictions – and the response was if I want to be I can be.
Allegedly, he foresaw a bumper crop later that year, where olive pressies were in demand and pushed to the limit and prices up. There was no confirmation of truth just a waiting game. he went to the local olive press house owners.
Thales reserves spaces at olive press houses - he pays his deposit with the option to use at the high peak period – he then charges what he wants in high season – or if his prediction was wrong and a poor olive harvest – he lets his option expire and the olive press owners keep the deposit.
An option – for a given deposit that you can either act upon or not and lose your option. The olive press owners is happy because he gets paid for the option purchase either way and if good harvest may lose out but at lease been paid but if a poor harvest – still got paid and if option not exercised, still has olive press to use (albeit in a poor harvest market). Edging bets.
Options are essentially gambling on movement or indeed acting as a hedge against volatility.
This is the same in the modern world of finance – rather than buying or selling shares – you can buy stock options with a deposit. You pay a deposit e.g. 10% of the value and you have a right to exercise the option or lose your deposit on the close date.
Put Option - an option to sell assets/stocks at an agreed price on or before a particular date.
Call Option - an option to buy assets/stocks at an agreed price on or before a particular date.