# A Brief Primer on Options

Options are a really interesting type of financial security. They are themselves part of a broader group of securities called derivatives. Derivatives, as the name suggests, derive their value from something else. This “something else” can be a stock, the outcome of some event, or even another derivative! Anyway, let’s focus on options, which typically derive their value from the price of a stock.

What I just described was a put option, which gives me the right to sell the underlying. We can also purchase the right to buy some stock at some strike price. This is called a call option. Call options work pretty much exactly inversely to puts: I can buy an option to buy a stock at a certain price, and if that stock goes up way past that price, then I’ll exercise my option and sell it immediately at the higher market price. And if the stock price doesn’t budge or goes down by expiry, then I won’t exercise the option and lose my premium. Now, let’s go through another example, with some actual numbers. Last week, Netflix had its earnings report and its stock soared by over 20%, from about $100 to$126. Now, if I had $1000, I could have bought ten shares of NFLX and made a$260 profit, which isn’t bad. But I could have also bought 200 NFLX call options at a strike price of $100 for about$5 each. That would have netted me a whopping $3000 profit from the same outcome. This is how we can use options as leverage and get a greater return on investment. Of course, there’s no free lunch: I easily could have lost the whole$1000 if the price didn’t go past \$100, since there would be no point in exercising the options. Meanwhile, I would have still made some profit had I flat-out bought the shares.