Options Education With Practical Application For Beginners and Professionals Alike

Step into the exciting world of options with Options Royale—your first option for investing like a pro, where all bets are ON! Our tools and resources are for seasoned traders and amateurs alike. Whether you work on Wall Street or at Wendy’s, we’ll help you turn trades into tendies.

What Are Stock Options? (Explained with an Analogy)

“An option contract gives the holder the right but not the obligation—i.e., the option—to buy the underlying equity at a specified price.”

Screech! How many times have you tried to learn about options trading only to find some technical definition like that above? “What the fuck!” you exclaim. Then you DM me via Reddit, asking me to explain, interrupting my morning session with PornHub.

Let’s put an end to the DMs now. I’ll explain options so a five-year-old can understand. Given that you work behind the Wendy’s, I’ll assume you are at least five years old.

Imagine there’s a mine near your home and it has gold in it. Let’s call gold the “underlying equity.” We can even give it a ticker: GOLD. Let’s pretend that gold is currently selling at $2,500 per ounce, and it’s assumed that it will increase in value. If you can get your hands on some gold, you might see a return on your investment.

But you don’t have the means to buy the gold—$2,500 per ounce is out of your price range. You also don’t have the equipment to go find and extract it yourself. BUT it just so happens that the owner of the gold mine near your house is selling claims to his mine.

A claim would give you the legal right to extract gold from the mine. And he’s selling his claims for cheap. The catch is they expire. As long as you possess the claim, you can try to get the gold and profit from it. The claim doesn’t mean you’re obligated to mine the gold, only that you have the right to try. But as soon as the claim expires, you’re SOL.

A claim is just a piece of paper—a legal document that makes it clear you have rights to extract the underlying asset for a given period of time. But now let’s imagine this claim is transferrable, or resalable. Do you see where this is going? If gold goes up in value, what’s gonna happen to the value of that claim? And what will happen to it if gold goes down in value? Never mind whether gold changes in value, what if there’s hype about gold—news, chatter, etc? Hype alone can affect the value of your claim.

For example, if everyone in town starts clamoring about gold because of some new technological application or whatever, and you have a claim to a mine known to contain gold, the value of your claim will increase. Of course, the opposite could happen too, say, if your town discovered that gold causes cancer, along with everything else that does.

Because the claim has value, you don’t have to dig for gold at all. You can resell the claim, let someone else try to profit from digging or speculating. And if your claim should expire before you resell or go digging yourself? Well, you just lost whatever you spent on that contract that is now worthless—no more, no less.

Options contracts are to equities as claims are to mines and the commodities therein. With mines, the claim changes in value as the underground commodity changes in (perceived) value. With options, the contract changes in value as the underlying equity changes in (perceived) value.

We’ll stop there. That should give you a fundamental understanding of what you’re working with should you enter the world of options trading. You can find more information—about strategies and terms—in our online guides.